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Community Health Systems to Acquire HMA for $7.6B

Community Health Systems, based in Franklin, Tenn., will acquire Naples, Fla.-based Health Management Associates in a deal valued at $7.6 billion.

Under the definitive merger agreement, which was unanimously approved by both companies' board of directors, CHS will pay Health Management $3.9 billion in cash and stock. CHS valued Health Management's stock at $13.78 per share. CHS will also assume $3.7 billion of Health Management's debt.

CHSlogoOnce the deal is completed, CHS will be the largest for-profit hospital operator in the country in terms of number of facilities, with 206 acute-care hospitals across 29 states. Nashville, Tenn.-based Hospital Corp. of America has 162, with three more pending in Florida, but will still be the largest hospital chain in terms of revenue. Last year, HCA had $33 billion in total revenue, whereas CHS and Health Management had a combined $18.9 billion.

CHS and Health Management expect the merger to close in the first quarter of 2014, but under Health Management's charter, at least 70 percent of shareholders must vote on and approve the deal. In addition, the deal is subject to antitrust and other regulatory approvals.

HMAlogo"This compelling transaction provides a strategic opportunity to form a larger company with a diverse portfolio of hospitals that is well-positioned to realize the benefits of healthcare reform and to address the changing dynamics of our industry," said Wayne Smith, chairman, president and CEO of CHS, in a news release. "Our complementary markets and the ability to form networks in key states, along with the synergies that will be available to us, can create value for the shareholders of our companies, the communities we serve, our employees and medical staffs."

Rumors of a potential deal between CHS and Health Management have been floating for several weeks. Earlier this month, a Reuters report said CHS, HCA and Brentwood, Tenn.-based LifePoint Hospitals all expressed interest in acquiring Health Management, though CHS was the frontrunner. Yesterday, CNBC journalist David Faber reported on his show that CHS and Health Management were close to striking a sale and that it would likely happen this week.

CHS became a likely buyer for several reasons. CHS and Health Management both predominantly have hospitals in rural or smaller geographic areas, though CHS will gain a much bigger footprint in Florida under the deal. Also, Health Management has been sparring with its largest shareholder, Glenview Capital Management, for a few months. Glenview — a New York City-based hedge fund run by billionaire Larry Robbins — owns 14.6 percent of Health Management, but it also owns almost 10 percent of CHS. Most recently, Glenview ripped into Health Management's lagging financial results and "unconstructive" executive behavior, specifically citing Health Management CFO Kelly Curry. Glenview has been trying to persuade Health Management shareholders to replace the hospital company's board of directors with eight new candidates in its campaign to "revitalize HMA."

This is now the second major merger deal in the for-profit hospital industry. Last month, Dallas-based Tenet Healthcare Corp. said it will buy Nashville, Tenn.-based Vanguard Health Systems in a transaction worth $4.3 billion, including $1.8 billion in cash.

While announcing the merger with CHS, Health Management also named John Starcher Jr. as interim president and CEO, effective Thursday. Mr. Starcher, 43, is currently president of Health Management's Eastern Group, which encompasses 23 hospitals in seven states. He will replace Gary Newsome, who announced in May he will retire to serve as president of a mission in Uruguay with the Church of Jesus Christ of Latter-day Saints.

In addition, Health Management released a preview of its second-quarter earnings, predicting net revenue fell 0.5 percent to $1.46 billion. Health Management attributed its inauspicious second-quarter results to low admissions, increases in observation stays, higher bad debt, a reduction in surgeries and the federal government's sequestration. Same-hospital admissions are expected to fall 6.7 percent in the second quarter compared with the second quarter of 2012, while same-hospital adjusted admissions are predicted to drop 2.4 percent.

Within that announcement, Health Management said it received four additional subpoenas over the past two months from HHS and the Office of Inspector General related to how Health Management admits people from its emergency department. Health Management has undergone, and continues to undergo, several federal investigations related to inpatient admissions from its EDs. In December, "60 Minutes" aired a segment on Health Management's practices, which the company said was reliant on "disgruntled former employees." CHS is no stranger to federal probes, as well. Earlier this month, CHS said the Department of Justice issued a new subpoena for the same type of allegations Health Management is facing, and several high executives within CHS are scheduled to meet with the DOJ on the matter.

More Articles on CHS, HMA and Hospital Mergers:
Report: CHS-HMA Deal May Happen This Week, But Challenges Linger
Consolidation Nation: Where Will the Hospital Industry Stand After the Tenet-Vanguard Merger?
Fitch: HMA is in Troubled Waters

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