HCA made its move last summer, and now Health Management Associates is charting a different course toward the same goal: placating shareholders while delivering bad news about future operations.
Observers of investor-owned hospital chains began 2007 wondering whether another company would follow in the footsteps of Nashville-based HCA and go private. HMA, Naples, Fla., considered that option and others, but came up with a different way to boost returns to shareholders.
Like a leveraged buyout, HMAs course of action will sharply increase the companys debt. Unlike a leveraged buyout, however, HMA will remain a publicly traded company. HMA shareholders as of Feb. 27 will receive a one-time dividend of $10 per share, or about $2.4 billion in total, the company said. HMA suspended its quarterly dividend to devote that cash to operations and retiring debt. The special dividend will be financed with $3.25 billion in new debt, which will also refinance some debt the company already has issued.
William Schoen, HMAs founder and chairman, said the company has been very successful with its operating and acquisition strategies in the six years since he stepped down as chief executive officer. Before this transaction, HMA had the least amount of debt relative to its size among hospital companies, and had acquired 25 hospitals and invested an additional $1.2 billion in its facilities over those six years, Schoen said, but the value of our share price does not recognize our many accomplishments.
HMAs board chose the special dividend as a way to reward shareholders without buying them out of the chance to earn future returns with the company, Schoen said.
The companys stock, adjusted for dividends, peaked in June 2005 at more than $26 per share, but now languishes at around $20 per share, even after the announcement, according to share prices compiled by Commodity Systems.
While announcing the special dividend, HMA also said it will record a $200 million charge in the fourth quarter of 2006 to boost its reserves for bad-debt expense. Like other for-profit chains that increased their bad-debt reserves in the third quarter, HMA said it is collecting a lower percentage of self-pay accounts.
The combination of increased debt and operating challenges led all three major bond-rating agencies to cut their ratings on HMAs debt. Before the special dividend was announced, the company had been one of two hospital companies rated investment-grade, along with Universal Health Services.