LifePoint assets could go into REIT following RCCH merger

LIFEPOINT HEALTH’S DEAL to merge with RCCH HealthCare Partners was a rising tide that lifted the boats of other for-profit hospital chains last week, serving as a reminder of private equity’s growing role in healthcare.

For-profit rural hospital operators LifePoint and RCCH, both based in Brentwood, Tenn., would have combined $8 billion in revenue and 84 hospitals, as well as physician practices, outpatient centers and postacute providers in 30 states. The companies signed a definitive agreement to merge and plan to close the deal, which would entail LifePoint transforming from a public company into a private one, within several months.

Private equity firm Apollo Global Management owns RCCH. It will pay LifePoint’s shareholders $65 per share in cash in the deal, resulting in a $5.6 billion valuation of LifePoint, including $2.9 billion in net debt and minority interest.

LifePoint’s chairman and CEO, William Carpenter III, will continue in those roles for the merged company, which will retain LifePoint’s name.

Martin Rash, chairman and CEO of RCCH, said in a news release that the opportunity to merge with LifePoint is a milestone in RCCH’s history. The company was formed through the merger of RegionalCare Hospital Partners and Capella Healthcare in 2016. Its owner, Apollo, entered the hospital business when it bought RegionalCare in 2015.

Some analysts believe Apollo will pursue a real estate investment trust structure for some of LifePoint’s assets, especially given its history of doing so with a portion of RCCH’s hospital portfolio. That could provide enough cash to get back a meaningful portion, if not all, of Apollo’s equity investment.

Ana Gupte, managing director of healthcare services with Leerink Partners, said Apollo was “quite successful” in converting some of RCCH’s assets into a REIT owned by Medical Properties Trust. RCCH management is familiar with REIT operations, and some executives have experience at other for-profit hospital chains like Community Health Systems.

Other examples of hospitals becoming part of REITs include Capella Healthcare, which in July 2015 sold its real estate to Medical Properties for $900 million. Ardent Medical Services and Steward Health Care have also converted a portfolio of their hospitals into REITs, Gupte said.

“With the REIT option, I think there is an opportunity to turn around the assets,” Gupte said. Rural hospitals face challenges as they try to grow their volumes and expand margins.

Matt Caine, a managing director at SOLIC Capital, said such a move would improve Apollo’s liquidity immediately. Then there’s the added benefit of the long-term payment stream that would come back to the REIT in the form of rent. The only drawback would be the higher cost of financing such an operation. “I would expect Apollo to pursue that,” Caine said.

Frank Morgan, an RBC Capital Markets analyst, said he hopes Apollo doesn’t plan to shift LifePoint’s assets to a REIT. He thinks the marketplace is more receptive to hospitals owning assets.

LifePoint’s share price rose 35% on the merger news July 23. Fellow for-profit hospital chain CHS was up 14% at close. Tenet Healthcare Corp. was up 8%. That’s likely because the LifePoint-RCCH deal raised the possibility of private equity investing in those chains.

“You could make the argument that on a valuation basis, those two are sort of the next in line for an attractive pop, relative to the value of their underlying assets,” Caine said. A possible deterrent to private equity’s investing in Tenet and CHS is the high leverage on their balance sheets, he said.

Gupte said Tenet is a company to watch for private equity interest, as it is also seeing significant activism among its investors.

She wrote in a report that the LifePoint deal will likely receive antitrust clearance with minor divestitures, although some may be necessary in Arizona and Tennessee, where both companies have hospitals.

Under the agreement, which must be approved by regulatory agencies and LifePoint’s shareholders, LifePoint may solicit alternative acquisition offers within a 30-day period. The purchase price represents a roughly 36% premium to LifePoint’s closing share price on July 20, the last trading day prior to the announcement.●

“With the REIT option, I think there is an opportunity to turn around the assets.”

Ana Gupte

Managing director of healthcare services Leerink Partners