Deals are brew­ing, but the pace hasn’t met ex­pec­ta­tions

Deals cook­ing, but not at pro­jected siz­zling pace

Modern Healthcare - - News - Vince Gal­loro

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.

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