Con­sol­i­da­tion wave rises

Sys­tems look to ac­qui­si­tion as part of health re­form

Modern Healthcare - - The Week In Healthcare - Vince Gal­loro

Who­ever ex­pected a bid­ding war to erupt over Youngstown, Ohio? The in­vestor-owned in­ter­est in Youngstown’s Fo­rum Health, along with the much larger deals an­nounced this year in Bos­ton and Detroit, are ex­am­ples of these com­pa­nies mov­ing be­yond high-growth mar­kets in the Sun Belt, ac­cord­ing to a re­port from Moody’s In­vestors Ser­vice. At the same time, the com­pet­ing bids from Ar­dent Health Ser­vices and Com­mu­nity Health Sys­tems for the three-hos­pi­tal, tax-ex­empt Fo­rum Health sys­tem show what could hap­pen to ac­qui­si­tion pric­ing if too many com­pa­nies chase af­ter too few deals, said Dean Diaz, vice pres­i­dent and se­nior credit of­fi­cer for Moody’s.

Nashville-based Ar­dent’s ini­tial bid for Fo­rum, which filed for Chap­ter 11 pro­tec­tion in U.S. Bank­ruptcy Court in Youngstown in March 2009, was for $69.8 mil­lion with a cap­i­tal com­mit­ment of $50 mil­lion to $70 mil­lion. Com­mu­nity, Franklin, Tenn., then an­nounced its bid of $100 mil­lion and a cap­i­tal com­mit­ment of $80 mil­lion over five years as it be­came the only other bid­der qual­i­fied to par­tic­i­pate in a bank­ruptcy auc­tion held last week in a Cleve­land law of­fice. Com­mu­nity pre­vailed in the bid­ding at $120 mil­lion, or al­most 72% higher than Ar­dent’s $69.8 mil­lion of­fer, ac­cord­ing to Fo­rum and Com­mu­nity.

So far, the com­pe­ti­tion for Fo­rum is the ex­cep­tion, as prices for hos­pi­tals have re­mained mod­er­ate de­spite all the in­ter­est from in­vestorowned hos­pi­tal com­pa­nies, Diaz said.

“Any time there’s com­pe­ti­tion for as­sets, there’s the pos­si­bil­ity of the price be­ing driven up,” he said. “Out­side of that deal, we haven’t seen ev­i­dence that that is hap­pen­ing. The prices are fa­vor­able with deals from sev­eral years ago.”

Even with the com­pe­ti­tion be­tween two com­pa­nies, the fi­nal sales price wasn’t even half of Fo­rum’s to­tal rev­enue of $393.5 mil­lion for 2009, ac­cord­ing to a fi­nan­cial dis­clo­sure to bond­hold­ers. The sys­tem posted an op­er­at­ing loss of $1.4 mil­lion and an over­all loss of $16.3 mil­lion. Health Man­age­ment As­so­ci­ates, Naples, Fla., is pay­ing about $145 mil­lion for two-hos­pi­tal Wuestoff Health Sys­tem, Rock­ledge, Fla., a sys­tem with about $290 mil­lion in an­nual net rev­enue (Aug. 2, p. 12). LifePoint Hos­pi­tals, Brent­wood, Tenn., has agreed to pay $154.1 mil­lion for four-hos­pi­tal Sum­ner Re­gional Health Sys­tems, Gal­latin, Tenn., which would be a pur­chase price about equiv­a­lent to net rev­enue.

In­vestor-owned hos­pi­tal com­pa­nies are more will­ing to move into Rust Belt mar­kets in part be­cause of health­care re­form, Diaz said. Mar­kets with higher lev­els of unin­sured and Med­i­caid pa­tients should, in the longer term, pro­vide fi­nan­cial op­por­tu­ni­ties closer to those found in the fast-grow­ing Sun Belt mar­kets that for-profit hos­pi­tals usu­ally stick to, he said.

The com­pa­nies also are at­tracted to these deals—in­clud­ing Van­guard Health Sys­tems’ pur­chase of six-hos­pi­tal Detroit Med­i­cal Cen­ter and Cer­berus Cap­i­tal Man­age­ment’s pur­chase of six-hos­pi­tal Car­i­tas Christi Health Care, Bos­ton—be­cause they of­fer the chance to en­ter a new mar­ket with a sig­nif­i­cant mar­ket share, Diaz said. In the case of the es­tab­lished hos­pi­tal chains, these deals also of­fer the chance to ex­pand the size and geo­graphic di­ver­sity of their hos­pi­tal port­fo­lios, he said.

More­over, the gen­eral in­crease in in­ter­est among in­vestor-owned hos­pi­tal chains for ac­qui­si­tions shows few signs of slow­ing down, Diaz said. “We ex­pect the con­sol­i­da­tion wave to con­tinue go­ing for­ward, and I think it can con­tinue for some time so long as the credit mar­kets re­main open and there’s no drive up in price from com­pe­ti­tion,” he said.

Other than a 10-bed hos­pi­tal bought in 2008, Ia­sis Health­care, Franklin, Tenn., has been quiet on the ac­qui­si­tion front since 2007, but David White, chair­man and CEO, noted last week that the com­pany hired a new busi­ness devel­op­ment of­fi­cer.

“We have be­gun to get in the game,” White said dur­ing an earn­ings call. “There’s noth­ing teed up at this time, but it’s get­ting to be a bit more ac­tive.”

Trum­bull Me­mo­rial is part of Fo­rum Health, which Com­mu­nity out­bid Ar­dent for.

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