The Health Care M&A Monthly: February’s Hospital M&A Market-
Triad Hospitals Privatized In $6.4 Billion Deal
On Monday, March 19, Community Health Systems (NYSE: CYH) announced that it was taking advantage of the go-shop provision in the $6.4 billion deal to privatize Triad Hospitals (NYSE: TRH), discussed below, and would make an enhanced offer of $6.8 billion to acquire the 54-hospital system. This announcement caught many by surprise since Community Health has never made such a large acquisition. However, the private equity firms that originally agreed to buy Triad and take it private appear not to be making a counteroffer. If this new deal goes through, the resulting company will be the largest publicly traded hospital management company in the country and the second-largest investor-owned hospital company (after HCA). Details and analysis will appear in the April issue of Irving Levin’s The Health Care M&A Monthly.
Last month’s issue featured recent activity in the not-for-profit Hospital M&A market. This month provides a sharp counterpoint with the $6.4 billion privatization of publicly traded Triad Hospitals (NYSE: TRI) by a consortium of private equity firms.
A spin-off of HCA (NYSE: HCA), Triad currently operates 51 hospitals and 10 outpatient surgery centers in 15 Sunbelt and Western states with a combined total of 8,070 beds. On a trailing 12-month basis, TRI generated revenue of $5.4 billion, EBITDA of $734.0 million and net income of $228.0 million.
The buyers include affiliates of CCMP Capital Advisors, LLC and Goldman Sachs’ GS Capital Partners. They are offering $50.25 per share, for a total of $4.39 billion, and will assume $1.79 billion in debt. This transaction offers TRI shareholders a 16% premium over the stock’s prior-day price. The relevant acquisition multiples are 1.2x revenue and 8.7x EBITDA.
It is doubtless just a coincidence, but this deal followed the release of a report by a Banc of America Securities analyst attributing the bad-debt problem faced by the hospital industry to the accounting of revenue recognition, not to an increase in the uninsured population. The analyst believes for-profit hospitals have been employing aggressive revenue recognition techniques to meet their investors’ quarterly earnings demands. Healthcare Financial Management Association’s (HFMA) Statement 15 says hospitals should recognize revenue for patient services only when they can reasonably expect to collect payment. In the case of the uninsured, where the expectation of actually getting paid should be low, some for-profits appear to be jacking up the anticipated revenue, which when uncollected would become a bad-debt write-off. In a ranking of seven for-profits, Triad Hospitals appeared to be the most aggressive among large hospital chains in doing this.
Naturally, as a private entity, TRI will have fewer shareholders—and more savvy ones— to be spooked by such issues. Triad is not the only hospital company, however, to face the challenges posed by revenue recognition procedures; last month, we noted Health Management Associates (NYSE: HMA) was taking steps to shore up its own procedures for dealing with so-called self-payor accounts. In any event, the president and CEO of HFMA appears to believe this amounts to a short-term timing issue which will effectively wash out over successive periods.
Carolinas HealthCare System (CHS), which operates or manages 19 hospitals in the Carolinas, recently announced plans to acquire 457-bed NorthEast Medical Center in Concord, North Carolina. This merger provides NorthEast with the needed capital and expertise to execute its growth plan, resources that would have been hard to muster as a stand-alone hospital.
NorthEast had held talks with rival system Presbyterian Healthcare, but ultimately decided on CHS instead. This announcement illustrates some of the soul-searching that is taking place among other acute-care providers in North Carolina’ Triad region. The president of Lexington Memorial Hospital, a 94-bed facility, is planning to ask his board of directors whether they would like to review their strategic choices, including merging with a larger system. Part of the backstory includes recent changes to how the government defines metropolitan statistical areas in the Triad, which have resulted in Lexington Memorial being reclassified as a rural hospital. The upshot is that it will lose about $700,000 per year in revenue beginning in October. While facilities in the Triad seem to exhibit a stubborn streak of independence, government tinkering with reimbursement protocols may drastically alter the provider landscape, prompting a merger. Just ask anyone in the home health care business.
Puerto Rico’s Sistema de Salud Metropolitano (SSM) is buying Pan American Hospital, a bankrupt 146-bed acute care facility in Miami, for $34.0 million, or 0.56x 2005 revenue. Pan American was founded in 1963 to serve the Cuban exile community, but it filed for bankruptcy protection in 2004 after accumulating debt from its 1999 purchase of 17 clinics from United Health Care. SSM’s subsidiary, Metropolitan Health Community Services, won the bankruptcy auction. HIG Capital, a Miami-based private equity firm bid $33.5 million, and Larkin Community Hospital of Miami also came up short. The facility has been renamed Metropolitan Hospital of Miami.
After receiving clearance from the state’s attorney general, Prime Healthcare Services (PHS) has virtually nailed down its $30.0 million acquisition for 301-bed Paradise Valley Hospital in National City, California. This bid beat out a competing $40.0 million bid from Paradise Preservation Group, largely because financing for the latter proposal remained contingent on approval. PHS’ receipt of clearance coincided with the announcement of another deal: PHS plans to buy 224-bed Anaheim Memorial Medical Center from Memorial Health Services.
Last month, we reported that Maryland-based Bon Secours Health System was looking to divest its 70 percent share of Bon Secours Cottage Health Services in Grosse Pointe, Michigan. At least five suitors have emerged in the interim: Oakwood Healthcare System of Dearborn, Michigan; Beaumont Hospitals, Royal Oak; St. John Health System, Warren; the Detroit Medical Center, Detroit; and, naturally, the Henry Ford Health System, Detroit. Naturally, since it already owns the other 30 percent of the Bon Secours Cottage J.V. In the Northern Plains, Essentia Health of Duluth, Michigan, and Dakota Clinic/Innovis Health of Fargo, North Dakota, have entered into merger talks that would convert the latter into a private, nonprofit subsidiary of nine-hospital Essentia. Innovis Health is a 74-bed hospital owned by The Dakota Clinic, a for-profit physician group with 22 clinics. With 2006 revenue of $1.07 billion, Essentia is much larger than Dakota Clinic/Innovis Health, with about $230 million. East Knoxville, Tennessee’s four-hospital Baptist Health System has hired Wellspring Partners to handle day-to-day operations while it keeps looking for a buyer or capital partner. Baptist had had in place an 80-20 joint venture with Triad Hospitals, which would have paid $180.0 million for its 80 percent interest. But that deal fizzled out last November because TRI’s timetable for finishing it wasn’t soon enough for Baptist Health. So it appears that Triad will go private without Baptist Health on board.