Chen's 22% stake in CHS carries clout—with or without a board seat
Tianqiao Chen's 22.1% stake in Community Health Systems could give him enough influence to encourage hospital sales at lower prices than what CHS has been demanding to accelerate CHS' divestiture strategy.
Chen, through his Singapore-based Shanda Group affiliates, roared back on the public scene less than a week ago by buying 9.8 million more shares of CHS to raise his equity stake from 13.7% to 22.1%.
He isn't talking yet publicly about what his designs are for CHS. The company won't comment either.
But he is buying CHS shares under an activist flag denoted by the 13D regulatory filings he makes when disclosing his holdings. That means he might at any time get involved in trying to change the strategy, leadership, ownership or board composition of the money-losing company.
In February, Baltimore-based asset management firm Legg Mason added Chen and Shanda President Robert Chiu to its board after Chen acquired 10% of the company's stock. Chen was named vice chairman as well to oversee expansion into Asia.
For the board seats and a pledge of $500 million in additional investment, Shanda agreed not to acquire more than 15% of Legg Mason shares over a three-year period, a promise commonly known as a stand-still agreement.
With his larger CHS stake, Chen has influence in decision-making with or without a board seat, said Larry Prybil, a professor at the University of Kentucky and former hospital system senior executive.
CHS CEO Wayne Smith has previously acknowledged that he and Chen occasionally talk.
Before filing a 13D disclosure on his CHS holdings in March, Chen had identified himself as a passive investor in the company.
But "being passive is not a very likely strategy at this point," Prybil said given Chen's stake and CHS' struggles.
Franklin, Tenn.-based CHS is the nation's second-largest investor-owned hospital company with 130 hospitals.
Smith has been leading CHS through an aggressive reorganization marked by the divestiture of hospitals and assets to cut operating losses and reduce an outsized $15 billion debt load.
CHS posted a $56 million net loss in the second quarter, citing a same-store drop in hospital admissions of 2.5%.
So far, CHS has sold 20 of its underperforming hospitals, has contracts to sell 10 more and expects additional hospital divestitures representing revenue of $1.5 billion.
Chen could demand CHS board seats to try to accelerate the divestiture campaign, said Brian Tanquilut, a Nashville-based healthcare analyst for Jefferies & Co.
CHS has been fetching between 10 and 12 times EBITDA for the 30 hospitals divested so far.
But as a powerful board representative Chen might encourage CHS management to move faster, Tanquilut said.
In May, CHS rejected a $2.4 billion offer for its eight hospitals around Fort Wayne, Ind., brought by a group of dissident physicians who had teamed with a private-equity group and hospital operator to make the pitch.
CHS noted at the time that the offer was at least $1 billlion too low—a decision that Chen publicly supported in a statement to Modern Healthcare.
But Tanquilut said that kind of deal with a better price might put those hospitals—which are some of CHS's most profitable—back in play. "Maybe (Chen) would push to sell Fort Wayne," he said.
Beyond divestitures, there's little Chen or other board members can advise from an operating standpoint to get CHS's stock moving upward, Tanquilut said.
The company is recruiting doctors in its key markets and ratcheting down hard on expenses to try to bring up margins. It has hospitals in 21 states, dominating markets in the southern U.S.
But the battle is an uphill one made harder by softening admission volumes across the country, Tanquilut said.
That's being caused by high-deductible plans prompting patients to put off procedures and a flattening of the number of newly insured covered under the Affordable Care Act and Medicaid expansion.
Two years ago, CHS shares were trading at about $64 per share. Chen paid between $6.10 and $7.10 per share for a total of $71.2 million for the 9.8 million more shares of CHS stock that he purchased in the past week.
Tenet Healthcare Corp., the nation's third-largest investor-owned hospital company, also shows the limits of what activist investors can achieve in the sector.
In January, 2016, Tenet got a stand-still agreement from activist Glenview Capital Management in exchange for two immediate Tenet board seats and two more a year later after the hedge fund had acquired a dominant 18% of the company's shares. The stand-still agreement was to assure that Glenview would not team up with other investors to gain control of the company.
Since that time, Tenet has piled up operating losses. And its stock price has sunk from about $23 per share to $12.92 Wednesday. Tenet's stock two years ago was about $52 per share.
Tanquilut said Tenet management is rightly divesting hospitals in non-core markets and using cash to increase its stake in ambulatory giant United Surgical Partners International as care shifts from inpatient to lower-cost outpatient settings for many procedures.
Tenet, for example, used the $750 million in proceeds from the sale of three Houston hospitals to pay back a loan used to raise its stake in USPI to 80%.
But the results, even with Glenview's board power, have been underwhelming, Tanquilut said. Tenet spokesmen did not return requests for comment.
"It's been tough," Tanquilut said. "We're in a challenged volume environment."
An edited version of this story can also be found in Modern Healthcare's Aug. 21 print edition.
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