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October 21, 2017 12:00 AM

As CHS, Tenet divest, competitors rush to buy their strategic assets at a premium

Dave Barkholz
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    Big hospital divestiture campaigns by the struggling for-profit systems Tenet Healthcare Corp. and Community Health Systems are providing competitors with a rare opportunity to snap up valuable assets.

    But the properties aren't going for cheap.

    The 30 hospitals that Franklin, Tenn.-based CHS has sold or agreed to sell in recent months are fetching a premium price on average of 10 to 12 times earnings before interest, taxes, depreciation and amortization, CHS senior executives have said.

    In July, HCA paid $750 million to buy three Tenet hospitals in Houston to boost its presence there to 13 hospitals. That was about 9.5 times the $80 million in annual EBITDA the three hospitals were generating.

    THE TAKEAWAY

    Not-for-profit health systems are joining HCA and select for-profit chains in pursuing hospital acquisitions that can expand their geographic turf.

    The restructurings at Tenet and CHS are offering well-capitalized not-for-profit systems rare opportunities to buy hospitals that they may have coveted for a long time, said Megan Neuburger, managing director for Fitch Ratings.

    For more than a decade, Tenet and CHS have been buyers of hospitals rather than sellers. "This is a unique period with (Tenet and CHS) in the midst of divestiture plans," Neuburger said.

    Buyers today often are willing to pay more for hospitals than in past years because they fill a real strategic niche for the acquirer, said Jeffries & Co. healthcare analyst Brian Tanquilut.

    Tacoma, Wash.-based MultiCare Health System gained a broader statewide presence in July through the $425 million purchase of CHS' two-hospital Rockwood Health System in Spokane, Tanquilut said.

    That kind of an acquisition by a regional not-for-profit like MultiCare gives the system greater leverage in managed-care negotiations, Tanquilut said.

    And the acquired hospitals can become a good profit center over time with some investment capital for new specialty services and outpatient points of access, he said.

    In fact, MultiCare plans to raise $61 million through a taxable revenue bond offering this month to improve operations in Spokane, according to a Moody's Investors Service report on the offering this month.

    "You're seeing buyers willing to pay a little higher multiple for hospitals," Tanquilut said. "But if you can turn a single-digit margin into a double-digit one, you've effectively cut a 10 times multiple (for acquisition) to maybe five times pretty quickly."

    The divestiture campaigns by CHS and Tenet are contributing to a very busy year for hospital merger and acquisition activity.

    M&A hospital transactions in 2017 are expected to eclipse the 120 completed in 2016, said Anu Singh, managing director at healthcare financial advisory firm Kaufman, Hall & Associates.

    In 2017 so far, there have been 87 announced hospital transactions, including 29 in the third quarter and 31 in the second quarter, he said.

    For the most part, the buyers were acting strategically, trying to fill a geographic need and round out service lines for a regional system, rather than being motivated simply by financial concerns, such as cash flow and incremental profit, he said.

    That thinking was on display during two deals announced in the third quarter: Ascension's planned acquisition of Presence Health in Chicago and a merger agreement between UNC Health Care and Carolinas HealthCare System.

    The latter deal combines the academic and specialty services of 14-hospital UNC with the Carolinas system, which owns, manages or has strategic affiliation with 47 hospitals, many of which operate in rural areas, Singh said. In the deal, rural patients gain easier access to the clinical trials and subspecialties that UNC Health Care brings to the table, while Carolinas can market that brand and quality as a differentiator, he said. About 70% of North Carolina's population is located within 20 miles of one of the partners' hospitals—a plus for coverage under managed-care contracts.

    Ascension's plans to buy 10-hospital Presence strengthen the foothold that Ascension already has in Chicago through its Alexian Brothers Health System joint venture with Adventist Midwest Health.

    Ascension said it would acquire Presence and operate it as part of the joint venture, called Amita Health, in Chicago's western and northwestern suburbs.

    Dallas-based Tenet, the nation's third-largest investor-owned hospital company by number of hospitals, is adding to the hospital consolidation enveloping the Chicago area.

    This month Trinity Health's Loyola Medicine in Chicago agreed to buy Tenet's MacNeal Hospital in suburban Berwyn, Ill. And Tenet said it was looking to sell its other three hospitals in the Chicago area to exit the market entirely.

    Singh said he expects those three hospitals won't be sold as a package to not-for-profit systems, as the big regional systems take what makes the most sense geographically and strategically for them.

    Finding the synergies and economies of scale that make mergers worthwhile is no easy task, according to a new study by the Deloitte Center for Health Solutions and the Healthcare Financial Management Association.

    sampling of deals

    On average, acquired hospitals suffer lower margins and revenue during the first two years after acquisition, despite reductions in expenses brought by the buyers, HFMA Senior Vice President Rick Gundling said.

    Buyers typically commit capital for such items as new services and information technology, while working through cultural and operating issues they encounter, he said. "Nobody said these kinds of things are a slam dunk," Gundling said of smooth mergers.

    The study looked at operating, financial and quality data related to 750 mergers and acquisitions between 2008 and 2014. It also included an online survey of 90 executives involved in the deals and 13 telephone interviews of executives.

    Margins and revenue usually improved after the two years as the acquired companies were absorbed into the bigger systems, Gundling said.

    Among respondents, 80% of acquiring hospitals made substantial capital investments in their targets, with 40% spending money to upgrade clinical information systems, the survey shows.

    Gundling said the top-performing acquirers had detailed game plans of how to improve operations at the acquired facilities and strong channels of communication to keep employees, physicians and the community in the loop.

    "Preparation and strategy are key," Gundling said.

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