More signs are emerging that investor-owned hospitals are expecting a busy acquisition market in 2010 and beyond.
A fruitful future
More investor-owned acquisitions in 2010
Last week, Nashville-based HCA hired Joseph Sowell as its senior vice president and chief development officer. Sowell, 53, is a senior partner at Waller Lansden Dortch & Davis, a Nashville law firm with connections to several of the investor-owned hospital companies based in the area. He replaces Carl George, who retired in March, as HCA's top executive for development, although Sowell also will take on some other duties as well, an HCA spokesman said. Sowell will be responsible for all activities related to mergers, acquisitions and divestitures for HCA, including transactions involving its hospitals, ambulatory surgery centers, physician practices and real estate.
In July, Nashville-based Vanguard Health Systems moved Trip Pilgrim from his role as head of its San Antonio market to be the privately-held company's chief development officer and senior vice president. Keith Pitts, Vanguard's vice chairman, noted that Pilgrim had worked on development in the corporate office before moving to San Antonio after the company acquired that city's Baptist Health System in January 2003.
“We see a lot of opportunities in the future,” Pitts said. Vanguard expects that, whatever happens with healthcare reform, there will be a lot of consolidation over the next three to five years, he said. “Doing things with other organizations takes a long time,” he added. “It's not something that happens overnight.”
The opportunities go beyond just hospitals, Pitts said. “We see the need to create more clinically integrated systems,” he said, adding that Vanguard doesn't necessarily have to own all of the pieces.
HCA executives declined to comment for this story. In HCA's conference call to discuss third-quarter earnings, however, Richard Bracken, president and CEO, said the company is seeing more acquisition activity, but most of the sellers are standalone hospitals, which don't interest the company unless they add to one of its existing markets. “We do, however, remain interested in properties that might become available that are consistent with our network strategy,” Bracken said. “We believe that our system works best when we have a concentrated group of assets—inpatient, outpatient, physicians—in any given market. If there are acquisitions that can be additive to those market strategies, we would be interested.”
In the same call, Milton Johnson, executive vice president and chief financial officer, added that HCA also will pursue deals with physicians.
Eb LeMaster, a managing director with Ponder & Co. and a former development executive with Nashville-based Ardent Health Services, said that other investor-owned companies have made bullish noises about acquisitions, too. For example, he said, Health Management Associates, Naples, Fla., recently agreed to a letter of intent to buy Sparks Health System, Fort Smith, Ark. Gary Newsome, president and CEO of HMA, said during the company's third-quarter earnings call that their acquisition pipeline continues to improve and should bear more fruit in 2010.
When Community Health Systems, Franklin, Tenn., offered a glimpse of their expectations for 2010, the company included two acquisitions in the outlook, and Wayne Smith, president, chairman and CEO, told stock analysts that the pressure on not-for-profit hospitals is providing acquisition targets for the company. Community has seen the price of acquisitions fall, from purchase prices equaling 70% to 80% of net revenue to more like 50% of net revenue, Smith added.
LifePoint Hospitals, Brentwood, Tenn., is looking for more acquisitions like its purchase earlier this year of 154-bed Rockdale Medical Center, Conyers, Ga., said Bill Carpenter, president and CEO in a third quarter earnings call. That is, the company wants to buy more hospitals that are larger than most of its portfolio, have good growth prospects and stand to benefit being part of a large system like LifePoint, Carpenter said.
Two start-ups—LHP Hospital Group, Plano, Texas, and RegionalCare Hospital Partners, Brentwood, Tenn.—are also looking to buy hospitals, LeMaster said. Both are led by the management teams from investor-owned companies that were acquired in the last five years: former Triad Hospitals executives started LHP, and former Province Healthcare Co. executives founded RegionalCare this summer.
“I think people are positioning for the future. The challenge is still the lack of high-quality targets,” LeMaster said. “We continue to see single-community hospitals marketed, but not multiple-hospital systems in major markets.” LeMaster agreed that healthcare reform of any stripe would boost deal activity.
HCA's hiring of Sowell also could be part of an effort to prepare the company for an initial public offering of shares, LeMaster said. “If I'm HCA and I've been all about paying down debt, and now I need to be about growth, I would want to fill out that team,” he said.
Sowell has prior experience as a development officer. He has been a partner at Waller Lansden since 1987, except for a three-year stint in the late 1990s, when he was vice president of development and later chief operating officer for Arcon Healthcare, a now-defunct company that developed rural outpatient centers.
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