Pressure mounting

Health Management Associates is under fire from an activist investor, but a change of ownership at the company may be little more than wishful thinking.

After two difficult quarters, the company's largest shareholder, Glenview Capital Management, is pushing for a new direction. It has ruled itself out as a buyer—which leaves the option of installing new management that will right the ship or finding a partner that will do so.

Changes are already underway at the Naples, Fla.-based chain, which operates 71 hospitals primarily in the Southeast, after being notified by Glenview that it wanted to “engage in communications” with management, the board and other investors about “ways to enhance shareholder value.” The $9.5 billion investment fund, which focuses heavily on healthcare companies, also has filed for antitrust approval to acquire up to $2.2 billion in stock or roughly 75% of the company.

HMA responded by steeling itself against a potential takeover by adopting a “shareholder rights plan” that would go into effect if any entity tried to acquire more than 15% of its shares. Glenview currently holds 14.6%.

Then, last week, CEO Gary Newsome announced plans to retire July 31. Newsome, 55, said in a news release that he is stepping down after being “called by the First Presidency of the Church of Jesus Christ of Latter-day Saints to serve as the president of its Uruguay-Montevideo mission.”Newsome, who has been at the helm of the company since September 2008, took home $8.3 million in total compensation last year.

Glenview clearly seems to be angling to turn a quick profit from its investment in HMA, much as it did after jumping into a beaten-down Tenet Healthcare Corp. stock last year, when that company had finally fended off a takeover attempt by Community Health Systems.

After HMA adopted its rights plan, Glenview issued a news release that said “in plain English” that “we have no present intention or future plan to buy either $2.2 billion of stock or 75% of HMA.”

Glenview, founded more than a decade ago by Larry Robbins, is no stranger to the healthcare space. As of March 31, Glenview was the largest institutional holder of Community Health Systems' shares, the second largest of LifePoint Hospitals and had a small stake in HCA.

It also held significant stakes in Life Technologies Corp. and Humana, as well as smaller positions in companies such as Cigna Corp., AmerisourceBergen Corp. and McKesson Corp.

Although Glenview's Schedule 13D was sparse, Brian Tanquilut, an analyst at Jefferies & Co., pointed to Glenview's playbook on Tenet as a possible tell. The hedge fund first took a 5.5% stake in the Dallas-based chain in March 2012, when it was trading at about $21 a share after fending off the $4.1 billion bid from Community.

Fourteen months later—and about a week after filing its 13D—Glenview, now Tenet's largest shareholder, sold 4 million Tenet shares at $47.75. “What they're showing here is that they're deep value guys,” Tanquilut said.

In an ironic twist, HMA's current troubles have their roots in that saga. The chain was caught in the crossfire when Tenet fired back at Community with a lawsuit alleging that the Franklin, Tenn., company was using improper admissions practices and overbilling Medicare for short-stay admissions instead of observation stays.

HMA, which was using the same emergency department management software as Community, suddenly found itself facing a subpoena from HHS' inspector general's office.

Then this past December, HMA's admissions practices—and whether it was pressuring physicians to boost their numbers—became the subject of an unflattering “60 Minutes” piece. The investigation increased its legal expenses, sharply decreased its admissions numbers and ultimately led the company to lower its earnings guidance for 2013.

Analysts largely believe HMA will overcome its challenges—and take advantage of all the optimism that investors have about expanded coverage under healthcare reform. But the company had been trading at a sharp discount to its peers, at least before takeover speculation led to a run in the market.

In theory, that could open the door for value investors like Glenview. Coupled with its current leadership void, “that makes them vulnerable,” Tanquilut said.At least one analyst, A.J. Rice at UBS, thought an investor could pay about $15 a share for HMA, or even more if it were willing to factor in the potential upside from healthcare reform next year. Rice wrote in a note to clients that Community Health Systems could also emerge as a strategic buyer since it has the same non-urban focus as HMA.

But Community, still not far removed from its takeover fight with Tenet, said at the Deutsche Bank investment conference last week that while it wouldn't rule out a multihospital deal, it had no interest in a hostile merger.Frank Morgan, an analyst at RBC Capital Markets, similarly pointed to HMA's challenges, including a high debt load and unresolved government investigations, as precluding a merger.

“I don't know how many people would want to step into that,” he said. “I don't see it. The likelihood of someone doing an unfriendly deal is probably pretty low.”

He said the next major event for the company will probably be the appointment of Newsome's successor, which is likely to be “more telling” about the company's strategy.

Tanquilut added that a number of uncertainties still exist for the hospital industry, from contract pricing under health insurance exchanges to Medicaid expansion decisions. And those unknowns are likely to give pause to some of the sector's more logical acquirers, namely HMA's larger peers HCA, Community and Tenet.

“I'm not completely discounting the fact that the larger hospital chains could look to consolidate,” Tanquilut said. But “I can't imagine that there's anything imminent at this point. It's really hard to value a strategic acquisition today.”

Still, HMA's unsettled state has allowed investors such as Glenview to stoke the speculation, and in the process, enhance the value of their own holdings. While some analysts thought Community's comments at the Deutsche Bank conference shut the door on an HMA takeover, others speculated that the evasive phrasing left the possibility open for a friendly deal.

Less than a week after HMA adopted its rights plan, the company's shares had returned all the losses they had in mid-April, when the chain first previewed its dismal first quarter financial results. Its shares closed Friday at a 52-week high of $13.79.

Follow Beth Kutscher on Twitter: @MHbkutscher