HMA shareholders OK CHS deal

After winning overwhelming support from Health Management Associates' shareholders, Community Health Systems is projecting that a combined hospital chain will emerge in the coming weeks that will be much stronger financially than the sum of its parts. But legal and financial challenges remain on both sides.

Once completed, the deal will be the second merger in four months between two large publicly traded hospital chains, at a time when consolidation is helping to boost shrinking operating margins as patient volume continues to decline. Such deals are also putting pressure on stand-alone community hospitals, which can't take advantage of the same back-office economies of scale.

Franklin, Tenn.-based Community's $3.9 billion offer received support last week from 98.7% of votes cast, which represented 81.7% of outstanding common shares of Naples, Fla.-based HMA. The strong support came despite a pre-meeting rally protesting the deal held by nurses represented by the American Federation of Teachers, which is also an HMA shareholder.

The deal, which required approval from at least 70% of shareholders, would create the largest chain by hospital count. While the transaction still needs regulatory approval—and received a “second request” for more documentation from antitrust regulators—a Community news release said the deal is now expected to close before the end of the month.

Community also said last week that it had obtained financing for the transaction through refinancing existing debt and a new $2.26 billion credit facility.

The AFT had raised concerns about a potential conflict of interest since the same hedge fund holds a leading position in both HMA and Community. Hedge fund Glenview Capital Management holds stakes of 14.5% and 9.9%, respectively, and had been a vocal player throughout the takeover process, even orchestrating a change of control of HMA's board.

After winning shareholder approval, Community announced executive promotions to prepare for the merger. Larry Cash, its current chief financial officer, will now be president of financial services and CFO. David Miller, currently president of Division 1 operations, will expand his role to oversee all six divisions and the integration of HMA's hospitals as chief operating officer. And Dr. Lynn Simon, chief quality officer, will be president of clinical services.

On Monday, Community previewed another quarter of weak financial results—including a sharp dip in year-over-year inpatient volume of 6.7% and a 4% drop in admissions adjusted for outpatient activity. But analysts were generally pleased with the earnings boost the chain is projecting from the merger this year. A news release said synergies are expected to total $100 million the first year, and $250 million over two years. Community is also aiming to close another three to four hospital buys.

Despite HMA's own struggles with volume, it has resolved some of its outstanding issues, such as a contract dispute with Blue Cross and Blue Shield of Mississippi. Its 10 hospitals in the state have been reinstated in the Mississippi Blues' network.

HMA has yet to resolve a number of government investigations and whistle-blower lawsuits. During the past few weeks, HMA disclosed that the federal government intends to intervene in as many as eight False Claims Act cases that allege violations of Medicare overbilling and improper financial relationships with physicians. Federal prosecutors have signaled that they are trying to consolidate the suits into a single multidistrict case, which could facilitate a settlement.

But Community, which is working to resolve similar investigations of its own, has built into the purchase price a contingent-value right of $1 a share, or roughly $270 million, that would be paid depending on the resolution of the legal issues.

Follow Beth Kutscher on Twitter: @MHbkutscher