Pres­sure mount­ing

HMA braces it­self as in­vestor pushes for change, CEO re­tires

Modern Healthcare - - THE WEEK IN HEALTHCARE - Beth Kutscher

Health Man­age­ment As­so­ciates is un­der fire from an ac­tivist in­vestor, but a change of own­er­ship at the com­pany may be lit­tle more than wish­ful think­ing. Af­ter two dif­fi­cult quar­ters, the com­pany’s largest share­holder, Glen­view Cap­i­tal Man­age­ment, is push­ing for a new di­rec­tion. It has ruled it­self out as a buyer—which leaves the op­tion of in­stalling new man­age­ment that will right the ship or find­ing a part­ner that will do so.

Changes are al­ready un­der­way at the Naples, Fla.-based chain, which op­er­ates 71 hos­pi­tals pri­mar­ily in the South­east, af­ter be­ing no­ti­fied by Glen­view that it wanted to “en­gage in com­mu­ni­ca­tions” with man­age­ment, the board and other in­vestors about “ways to en­hance share­holder value.” The $9.5 bil­lion in­vest­ment fund, which fo­cuses heav­ily on health­care com­pa­nies, also has filed for an­titrust ap­proval to ac­quire up to $2.2 bil­lion in stock or roughly 75% of the com­pany.

HMA re­sponded by steel­ing it­self against a po­ten­tial takeover by adopt­ing a “share­holder rights plan” that would go into ef­fect if any en­tity tried to ac­quire more than 15% of its shares. Glen­view cur­rently holds 14.6%.

Then, last week, CEO Gary New­some an­nounced plans to re­tire July 31. New­some, 55, said in a news re­lease that he is step­ping down af­ter be­ing “called by the First Pres­i­dency of the Church of Je­sus Christ of Lat­ter­day Saints to serve as the pres­i­dent of its Uruguay-Mon­te­v­ideo mis­sion.”

New­some, who has been at the helm of the com­pany since Septem­ber 2008, took home $8.3 mil­lion in to­tal com­pen­sa­tion last year.

Glen­view clearly seems to be angling to turn a quick profit from its in­vest­ment in HMA, much as it did af­ter jumping into a bea­t­en­down Tenet Health­care Corp. stock last year, when that com­pany had fi­nally fended off a takeover at­tempt by Com­mu­nity Health Sys­tems.

Af­ter HMA adopted its rights plan, Glen­view is­sued a news re­lease that said “in plain English” that “we have no present in­ten­tion or fu­ture plan to buy ei­ther $2.2 bil­lion of stock or 75% of HMA.”

Glen­view, founded more than a decade ago by Larry Rob­bins, is no stranger to the health­care space. As of March 31, Glen­view was the largest in­sti­tu­tional holder of Com­mu­nity Health Sys­tems’ shares, the sec­ond largest of LifePoint Hos­pi­tals and had a small stake in HCA.

It also held sig­nif­i­cant stakes in Life Tech­nolo­gies Corp. and Hu­mana, as well as smaller po­si­tions in com­pa­nies such as Cigna Corp., Amerisource­Ber­gen Corp. and McKes­son Corp.

Al­though Glen­view’s Sched­ule 13D was sparse, Brian Tan­quilut, an an­a­lyst at Jef­feries & Co., pointed to Glen­view’s play­book on Tenet as a pos­si­ble tell. The hedge fund first took a 5.5% stake in the Dal­las-based chain in March 2012, when it was trad­ing at about $21 a share af­ter fend­ing off the $4.1 bil­lion bid from Com­mu­nity.

Four­teen months later—and about a week af­ter fil­ing its 13D—Glen­view, now Tenet’s largest share­holder, sold 4 mil­lion Tenet shares at $47.75. “What they’re show­ing here is that they’re deep value guys,” Tan­quilut said.

In an ironic twist, HMA’s cur­rent trou­bles have their roots in that saga. The chain was caught in the cross­fire when Tenet fired back at Com­mu­nity with a law­suit al­leg­ing that the Franklin, Tenn., com­pany was us­ing im­proper ad­mis­sions prac­tices and over­billing Medi­care for short-stay ad­mis­sions in­stead of ob­ser­va­tion stays.

HMA, which was us­ing the same emer­gency depart­ment man­age­ment soft­ware as Com­mu­nity, sud­denly found it­self fac­ing a sub­poena from HHS’ in­spec­tor gen­eral’s of­fice.

Then this past De­cem­ber, HMA’s ad­mis­sions prac­tices—and whether it was pres­sur­ing physi­cians to boost their num­bers— be­came the sub­ject of an un­flat­ter­ing “60 Min­utes” piece. The in­ves­ti­ga­tion in­creased its le­gal ex­penses, sharply de­creased its ad­mis­sions num­bers and ul­ti­mately led the com­pany to lower its earn­ings guid­ance for 2013.

An­a­lysts largely be­lieve HMA will over­come its chal­lenges—and take ad­van­tage of all the op­ti­mism that in­vestors have about ex­panded cov­er­age un­der health­care re­form. But the com­pany had been trad­ing at a sharp dis­count to its peers, at least be­fore takeover spec­u­la­tion led to a run in the mar­ket.

In the­ory, that could open the door for value in­vestors like Glen­view. Cou­pled with its cur­rent lead­er­ship void, “that makes them vul­ner­a­ble,” Tan­quilut said.

At least one an­a­lyst, A.J. Rice at UBS, thought an in­vestor could pay about $15 a share for HMA, or even more if it were will­ing to fac­tor in the po­ten­tial up­side from health­care re­form next year. Rice wrote in a note to clients that Com­mu­nity Health Sys­tems could also emerge as a strate­gic buyer since it has the same non-ur­ban fo­cus as HMA.

But Com­mu­nity, still not far re­moved from its takeover fight with Tenet, said at the Deutsche Bank in­vest­ment con­fer­ence last week that while it wouldn’t rule out a mul­ti­hos­pi­tal deal, it had no in­ter­est in a hos­tile merger.

Frank Mor­gan, an an­a­lyst at RBC Cap­i­tal Mar­kets, sim­i­larly pointed to HMA’s chal­lenges, in­clud­ing a high debt load and un­re­solved govern­ment in­ves­ti­ga­tions, as pre­clud­ing a merger.

“I don’t know how many peo­ple would want to step into that,” he said. “I don’t see it. The like­li­hood of some­one do­ing an un­friendly deal is prob­a­bly pretty low.”

He said the next ma­jor event for the com­pany will prob­a­bly be the ap­point­ment of New­some’s suc­ces­sor, which is likely to be “more telling” about the com­pany’s strat­egy.

Tan­quilut added that a num­ber of un­cer­tain­ties still ex­ist for the hos­pi­tal in­dus­try, from con­tract pric­ing un­der health in­sur­ance ex­changes to Med­i­caid ex­pan­sion de­ci­sions. And those un­knowns are likely to give pause to some of the sec­tor’s more log­i­cal ac­quir­ers, namely HMA’s larger peers HCA, Com­mu­nity and Tenet.

“I’m not com­pletely dis­count­ing the fact that the larger hos­pi­tal chains could look to con­sol­i­date,” Tan­quilut said. But “I can’t imag­ine that there’s any­thing im­mi­nent at this point. It’s re­ally hard to value a strate­gic ac­qui­si­tion to­day.”

Still, HMA’s un­set­tled state has al­lowed in­vestors such as Glen­view to stoke the spec­u­la­tion, and in the process, en­hance the value of their own hold­ings. While some an­a­lysts thought Com­mu­nity’s com­ments at the Deutsche Bank con­fer­ence shut the door on an HMA takeover, oth­ers spec­u­lated that the eva­sive phras­ing left the pos­si­bil­ity open for a friendly deal.

Less than a week af­ter HMA adopted its rights plan, the com­pany’s shares had re­turned all the losses they had in mid-April, when the chain first pre­viewed its dis­mal first quar­ter fi­nan­cial re­sults. Its shares closed Fri­day at a 52-week high of $13.79.

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