Deals are brewing, but the pace hasn’t met expectations
Deals cooking, but not at projected sizzling pace
Each time a wave of hospital dealmaking begins to rise up, dealmakers wonder whether its crest will approach that of the Columbia Healthcare Corp.-fueled wave of the 1990s. “Activity is definitely up, but in terms of sheer numbers of deals, we still haven’t seen the big wave that many people have thought we would,” said Eb LeMaster, a managing director for advisory firm Ponder & Co.
Delivery system changes brought on by healthcare reform continued tough access to capital for tax-exempt hospitals and the positioning of investor-owned hospital companies, however, could build a wave that might rival the wave of the 1990s, LeMaster added. Ponder’s tax-exempt clients are much more willing to entertain discussions, if not action, of a sale or other transaction, LeMaster said, to the point where they almost consider it a fiduciary duty to look into it.
Another important factor is the intensifying of physician alignment strategies, LeMaster said. These are seen as a way to combat the weak-volume environment and also adapt to healthcare reform, but they are another drain on capital, he said.
Investor-owned hospital companies are able to take advantage of these opportunities because they have paid down debt and improved their financial performance over the past few years, LeMaster added. The improvement in earnings before interest, taxes, depreciation and amortization, or EBITDA, has lowered their debt-to-EBITDA ratios, he said. That ratio is part of many debt covenants and watched by the bond ratings agencies.
Health Management Associates, Naples, Fla., has provided the latest bit of momentum in this year’s wave. The company said last week that it has agreed to acquire twohospital Wuesthoff Health System, Rockledge, Fla., for about $145 million. HMA expects to complete its acquisition of the taxexempt system by Oct. 1.
The deal is the second HMA has made with a Florida not-for-profit system this year. On July 1, HMA acquired a 60% interest in three rural hospitals owned by Shands HealthCare, Gainesville, for $21.5 million.
HMA’s pitch is convincing to tax-exempt systems because of its history of acquiring or starting joint ventures with tax-exempt systems, said Gary Newsome, president and CEO of HMA. “We have demonstrated an ability to work with these communities and partners,” Newsome said. “It certainly is competitive out there. What’s great is our pipeline is full. There’s many more opportunities presented to us than we can take advantage of at this time.”
More significantly, the Wuesthoff deal is part of a string of acquisitions of tax-exempt hospitals or systems by investor-owned hospital companies this year. The two biggest deals were announced in March—Vanguard Health Systems agreed to pay and invest $1.27 billion to acquire six-hospital Detroit Medical Center and Cerberus Capital Management said it would pay and invest between $830 million and $850 million to acquire sixhospital Caritas Christi Health Care, Boston (April 5, p. 6). Both deals are still pending regulatory approval.
More modestly sized conversion deals have proliferated, too. Community Health Systems, Franklin, Tenn., paid about $20 million to acquire Marion (S.C.) Regional Healthcare System, and has another deal pending in West Virginia that it expects to complete by the end of the year. HCA announced in June that it had agreed to acquire 357-bed Mercy Hospital in Miami from Catholic Health East for undisclosed terms.
Two major tax-exempt acquisitions are in the works in Ohio. Startup RegionalCare Hospital Partners, Brentwood, Tenn., has agreed to a deal worth a total of $156.7 million, combining purchase price and capital commitments, to acquire CMH Regional Health System, Wilmington, Ohio. Ardent Health Services, Nashville, has agreed to pay $69.8 million and make a capital commitment of $50 million to $70 million to acquire three-hospital Forum Health, Youngstown, Ohio.
LifePoint Hospitals, Brentwood, Tenn., acquired a hospital in Winchester, Ky., and is close to completing a $154.1 million deal to acquire four-hospital Sumner Regional Health Systems, Gallatin, Tenn. Tennessee Attorney General Robert Cooper Jr. last week announced that he would not take any action on the sale, clearing the way for the deal to be completed.
Health Management Associates has agreed to acquire Wuesthoff Health.