HMA Board Approves $7.6B CHS Acquisition

The transaction cleared a key sticking point when Glenview Capital Management, which owns 14.5% of Health Management Associates stock, agreed to the sale. Community Health Systems is expected to complete its acquisition during the first quarter of 2014.

A $7.6 billion deal that would create the nation's largest for-profit hospital company moved closer to completion when the board of directors at Health Management Associates, Inc. announced Wednesday that it unanimously endorsed the sale of the Naples, FL-based hospital chain to Community Health Systems, Inc.

"After conducting an extensive review in conjunction with our legal and financial advisors, we are confident that this transaction provides maximum value to HMA stockholders and represents the best path forward for the Company," HMA Board Chairman Steve Shulman said in prepared remarks.

"HMA and Community Health Systems are stronger together. The combined entity will be better positioned to address healthcare trends and challenges. In addition, the combined organization will have a greater local and regional market depth, expanded physician relations and physician footprint, and solid clinical operations infrastructure. The transaction remains on track to close during the first quarter of 2014, as scheduled, and we appreciate the patience of all our stakeholders as the board conducted its review."

The deal, expected to be finalized in the first quarter of 2014, cleared a key sticking point when Glenview Capital Management, which owns 14.5% of HMA stock gave its approval.

"We believe in the compelling strategic rationale driving the transaction and believe CHS is acquiring high quality assets whose fundamental performance will be significantly enhanced through the combined efforts of HMA and CHS leaders," Glenview said in prepared remarks. "CHS is well positioned to apply its best practices in core operational areas like physician relationships and recruiting, vendor contracting and clinical management to further stabilize and improve HMA's quality, service delivery and financial performance."

Under terms detailed by the two companies, HMA will be acquired by CHS for approximately $7.6 billion, including outstanding debt. CHS will acquire each issued and outstanding share of the common stock of HMA for $10.50 in cash, 0.06942 of a share of CHS common stock and a Contingent Value Right, which could yield additional cash consideration of up to $1 per share. HMA stockholders will own approximately 16% of the shares of the combined company following close of the transaction, the two companies said in a joint press release.

Franklin, TN-based CHS is already one of the largest publicly-traded hospital companies in the nation and operates 125 mostly general acute-care hospitals in nonurban and mid-size markets in 29 states with approximately 20,000 beds. HMA through affiliates owns and manages 71 hospitals and ambulatory surgery centers in small cities and selected larger urban markets in 15 states with approximately 11,000 licensed beds.

"We are excited to combine these two organizations to create a hospital company with more than 200 facilities and leverage our relative strengths and combined scale to better serve our patients, physicians and communities. We are pleased to have the full support of HMA's new board of directors as we move forward to complete this transaction in the first quarter of 2014," Wayne T. Smith, chairman/president/CEO of CHS said in prepared remarks. "This transaction will broaden our footprint into new geographic markets, allow us to form stronger networks and improve access to care, and strengthen our position for greater benefit and success under health care reform."

The HMA board had already approved the deal in July. However, Glenview raised concerns about the competence of senior leadership and the board at HMA and whether or not they had secured the best deal from CHS. Glenview ousted the board and installed a new board in August.

Since then, the new board has met 11 times, conducted 18 committee meetings, and hired independent analysts to conduct a review of the deal. The board also assumed short-term oversight of the company after a period of upheaval that included the departure in July of CEO Gary Newsome.

Adam Powell, a healthcare economist and president of Boston-based Payer+Provider Syndicate, says the new company that emerges from the acquisition "will have a larger footprint than any other company. Given the massive scale of the combined entity, it is likely to achieve both economies of scale and negotiating strength that HMA could never have achieved independently."

"It has been reported that building a hospital costs roughly $300 per square foot. Thus, spending $7.6 billion on hospital construction would yield about 25 million square feet of hospital space. If a large hospital has an average of about 600,000 feet of floor space, spending $7.6 billion on new hospital construction would yield about 40 hospitals. Thus, receiving 71 hospitals for the price seems like a deal," Powell says.

"That being said, not all of the hospitals may be optimally situated, and some may need to close, making them less valuable than new constructions. However, the hospitals have reputations and referral networks that new hospitals would not have. These intangibles add value, and may offset some of the drawbacks associated with acquiring a few undesirable hospitals."