Quorum Health could be the latest healthcare provider to be gobbled up by private equity investors, if the beleagured chain accepts a buy-out proposal from KKR.
The 24-hospital, publicly traded company has struggled since it was formed in 2016, posting more than $300 million in net losses in 2017 and 2018 combined. Quorum said it's considering private equity firm KKR's offer to buy out its public shares held by minority owners for $1 per share. That would value the company at about $33 million, based on the number of outstanding shares as of Nov. 6.
"The fact that they're being approached with a potential solution, I would think their board would take that very serious, and it sounds like they are," said Frank Morgan, an analyst with RBC Capital Markets.
The deal would mean that Brentwood, Tenn.-based Quorum join the ranks of other privately held hospital companies, such as Boston-based Steward Health Care.
Quorum's stock fell 5.6% on Wednesday and has plummeted 80% in the past two years.
"The company's board of directors will, together with its financial and legal advisors, carefully consider this letter as part of its ongoing engagement with its debt and equity holders," Quorum wrote in a statement.
KKR currently owns more than 9% of Quorum's common stock, according to a letter the company wrote to Quorum's board. The letter also said KKR is the largest holder of Quorum's outstanding debt. It said the two companies have been in discussions over a potential deal.
In addition to the buy-out, KKR says the deal should include restructuring Quorum's debt, equitizing the par value of the senior notes and injecting new capital by raising equity from participating noteholders. New capital would be issued as common stock in the recapitalized company and offered to participating noteholders, the letter says. KKR declined to comment beyond the letter.
RBC's Morgan said Quorum would benefit from having a strong financial partner as opposed to having to renegotiate its debt covenants with banks on its own. He noted the $1 per share offer equates to about 8.4 times Quorum's projected 2019 earnings before interest, taxes, depreciation and amortization.
"In today's world, looking at it purely from a valuation perspective, that would seem to be pretty good," he said.
Quorum, which operates in rural and mid-sized markets, spun off from Franklin, Tenn.-based Community Health Systems in April 2016. Since then, it's been working to sell off underperforming hospitals to pay down its debt. The company had 38 hospitals when it was spun off.
Quorum has struggled in recent years, posting a $200.2 million net loss in 2018 on nearly $1.9 billion in net operating revenue, compared with a $114.2 million net loss in 2017 on $2 billion in operating revenue, according to Modern Healthcare's financial database.
Meanwhile, the company's stock price has shed 73% of its value since the beginning of the year, about 80% in the past two years. It's currently valued at 85 cents per share.
Quorum's high debt load and interest expenses severely constrain its cash flow, Moody's Investors Service wrote in its November downgrade and negative outlook for the company. Difficulty selling off hospitals and implementing efficiency programs will limit Quorum's ability to improve its near-term performance, the agency said.
KKR is among a long list of private equity firms that have increasingly invested in healthcare assets, especially physician specialty groups. There were 181 private equity deals for all types of physician practices last year, according to a Bloomberg Law analysis.
KKR bought physician staffing company Envision Healthcare Corp. last year in a deal valued at $9.9 billion in cash and debt. Envision had previously been a public company.
Another physician staffing firm, TeamHealth, was purchased by affiliates of the Blackstone Group, one of the country's largest private equity firms, in 2016.
More broadly, healthcare assets attracted private equity investors at record levels last year, with disclosed deal values surging almost 50% to $63.1 billion in 2018, compared with $42.6 billion in 2017, according to an April report from Bain & Company.
The outsized presence of private equity in healthcare service companies is one reason S&P Global Ratings tends to rate healthcare service providers lower than medical device and pharmaceutical companies, the agency wrote in a January 2018 report. That's partly because of private equity owners' tendency to aggressively use debt leverage. S&P noted that private equity investors owned 60% of the health care services companies it rated at the time, compared with just 10% of its pharmaceutical companies and 30% of healthcare equipment companies.
Quorum announced earlier this year it would outsource its revenue cycle management to Chicago-based R1 RCM. Moody's said that change was one factor behind its negative outlook for the company, as such moves come with high execution risk. Another factor was the difficulty of divestitures and the potential operating disruption that could come from migrating IT and other systems away from the agreement Quorum still holds with CHS over the next 12 to 18 months.
