Consolidation wave rises
Systems look to acquisition as part of health reform
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.