Why a Chinese billionaire is now the biggest investor in CHS

Turnover among top shareholders of distressed Community Health Systems has happened so dramatically over the past eight months that management could be excused if they need an introduction to the newcomers.

The new largest shareholder is Tianqiao Chen, a Chinese billionaire who made his initial fortune in online gambling.

Chen, through affiliate Shanda Media, announced last Monday that he had accumulated 11.3 million shares of CHS, or 9.9% of common shares. Then he added another 88,000 CHS shares days later to make it an even 10%.

The year started with hedge fund Glenview Capital Management as the hospital company's largest shareholder with 11.6 million shares, or 9.8%.

But Glenview and CEO Larry Robbins, which promoted the messy sale of Health Management Associates to CHS in 2014, sold its entire CHS stake in the first quarter after losing faith that HMA's 60-plus hospitals could be made to fit profitably into the larger company.

That left Boston-based Wellington Management briefly atop the shareholder list with 11.3 million shares until Chen arrived on the scene this month.

What the musical chairs among largest shareholders means for the Franklin, Tenn.-based chain is yet to be seen.

Neither Chen nor Wellington likely intend to be activist investors and demand board seats to foist operational changes on management, said Brian Tanquilut, senior vice president of healthcare equity research at Jefferies & Co. Rather, they probably saw CHS' depressed stock price as a buying opportunity.

During the time Chen and Wellington were buying big into CHS this year, the company's stock was trading for less than $20 a share. It closed Friday at $10.21 after trading a year ago for $60 a share.

Chen doesn't have a track record as an activist shareholder. And in a highly regulated industry, the Chinese national isn't likely to make waves with a power play at CHS, Tanquilut said.

On the other hand, Chen does look for deals.

In June, his Shanda Group raised its stake in distressed Lending Club to 15.1% from 11.7% two days after Lending Club's CEO was forced out.

Wellington, a giant mutual fund that bought 2.8 million more shares of CHS in the second quarter to bring its holdings to 11.3 million shares, also is not known for activism.

As an investment, CHS may take a while to work through its current malaise, Tanquilut said.

But it's also probably not a bankruptcy risk, despite racking up losses from continuing operations of $1.37 billion in the first half of 2016, mostly on a massive accounting write-down of goodwill, Tanquilut said.

That's because CHS raised $1.2 billion to pay down debt this year by spinning off 38 rural hospitals into a separate company, Quorum Health Corp. And CHS has announced that it is negotiating to sell another 12 hospitals this year for net proceeds of another $850 million.

A CHS spokeswoman declined to comment for this story. Messages left for Shanda and Wellington representatives were not returned.

If a current CHS shareholder is liable to take an activist tack, Tanquilut said, it might be an investor such as Kohlberg Kravis Roberts & Co., the giant private equity group that has accumulated about 3.5 million shares of CHS this year. That's a 3.1% stake, making KKR the 12th largest institutional shareholder in CHS as of June 30, according to Morningstar.

CHS still has a tough row to hoe to get healthy. The 61 hospitals that CHS purchased as part of HMA are still cumulatively producing margins much lower than CHS' 92 legacy hospitals owned before the HMA deal, Chief Financial Officer Larry Cash said in a recent earnings call.

That's despite bringing extra physician recruitment and management attention to the former HMA operations, Cash said.

Tanquilut said he's not sure activist pressure would make the turnaround go any faster. “Rural healthcare is really being challenged with volumes under pressure,” he said.