Community Health Systems announced that its spinoff of 38 small-market hospitals into a new company called Quorum Health Corp. will likely take place before the end of June rather than in March, as originally planned.
The Franklin, Tenn.-based health system said market conditions contributed to the delay of the deal, which was announced in August.
CHS spokeswoman Tomi Galen declined to comment.
Fear of an economic slowdown in China is again causing investor anxiety and market volatility. Investors also found reason to worry as last year ended with the expected announcement from the Federal Reserve that it would raise interest rates for the first time in nearly 10 years, putting more stress on leveraged companies. At the end of 2015, fewer borrowers with speculative credit, which is the rating expected for Quorum, entered the market, said Dean Diaz, a senior vice president for Moody's Investors Service.
Hospital operators also took at hit last year as third-quarter performance suggested that gains from Affordable Care Act insurance expansion may have started to fade, he said. "The healthcare companies—the providers—started to see some reductions in their equity value," Diaz said. "It more or less began with the weaker results in the third quarter last year."
Negative healthcare news may have also contributed to CHS' decision to wait on the spinoff, said Megan Neuburger, a managing director at Fitch Ratings. The ACA continues to be a political flashpoint, and Congress on Wednesday for the first time managed to pass a bill to repeal the law. (President Barack Obama has promised a veto.) Additionally, hospitals have seen a weaker flu season and softer volume, which may have contributed to investors' hesitation, she said.
“I think it's probably a combination of the healthcare and hospital issues, but also things that are completely outside the control of the industry's management team,” such as anxiety over China, Neuburger said of the delayed deal.
Postponing a spinoff is “not unprecedented,” she said, but it has not been common. “I haven't seen it in awhile. It's an interesting development in the sense that markets have been favorable for a long time,” Neuburger said. But that may be changing, she added.
Unlike other deals with more rigid timetables and penalties for missed deadlines, CHS can wait until markets stabilize before going forward, Diaz said. "A delay may not be that big an issue," he said.
Community Health Systems, which acquired Health Management Associates in 2014, said shedding the Quorum hospitals would allow the company to concentrate on larger markets with more growth opportunities, while giving the smaller hospitals a new management team dedicated to their needs.
“The transaction will facilitate a sharper focus on the hospitals that are retained by Community Health Systems, especially in high-opportunity markets, and in areas where we are building regional healthcare networks,” CEO Wayne Smith said in a statement when CHS announced the Quorum deal.