The rating watch — which includes CHS’ “B+” issuer default rating — takes into account anticipated obstacles in the completion of the Health Management acquisition, such as approval from shareholders. Health Management has been experiencing conflict with its largest shareholder, Glenview Capital Management, for a few months. New York City-based Glenview has been pushing for shareholders to replace the Health Management board of directors and has said it will continue to move forward with its plan, viewing the CHS acquisition offer as a floor value for Health Management.
The negative watch also results from risks in CHS’ operating profiles, according to Fitch. Both companies are also facing government regulatory investigations into Medicare billing practices, and Health Management has seen lower patient volume.
Additionally, Fitch anticipates the $10.50 per share cash consideration will be debt-funded, which will mean a ratio of more than 5.5x of debt-to-EBITDA. For the combined companies to maintain the current “B+” rating, that ratio will have to drop to below 5x EBITDA within 18 months after the transaction is complete, according to Fitch.
Despite these and other factors influencing the rating watch, Fitch found the merger is strategically sound for CHS, given that reforms such as the Patient Protection and Affordable Care Act favor larger, integrated health systems.
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