Health Management Associates Inc.
) recently revealed expected, unaudited results for the second
quarter of 2013 and updated outlook for 2013. In a parallel
development, the company disclosed a sellout agreement.
Q2 Results Preview
The company expects second quarter 2013 adjusted earnings per
share in the range of 10-11 cents. Adjusted earnings in the
quarter exclude interest rate swap charge of about 5 cents. The
current Zacks Consensus Estimate is pegged higher at 21 cents.
Revenues are forecast in the neighborhood of $1,464 million. The
Zacks Consensus Estimate of $1,484 million is higher than the
Same hospital admissions were down 6.7% while adjusted admissions
dropped 2.4% in the quarter due to sustained decline in uninsured
admissions and higher observation stays. Health Management
expects same hospital net revenue to decrease by about $74
million. This reflects decline in surgeries, higher bad debt,
considerable increase in observation stays (up 12%), lower
revenue per adjusted admission due to adverse shift in payor mix
and the impact of sequestration.
Outlook for 2013
Based on the unaudited second-quarter results and ongoing
weakness in admissions, Health Management updated its guidance
for 2013. Net revenue (before bad debt expense) is envisaged in
the band of $6,800−$7,000 million. This includes the positive
impact from the company's stake in Bayfront Health System. The
current Zacks Consensus Estimate of $5,970 million is well behind
the company's expectations.
Health Management forecast EPS from continuing operations in the
range of 59−70 cents. However, this does not take into account
the interest rate swap expense of $75−$85 million. The Zacks
Consensus Estimate, considering the interest rate swap charges,
is pegged at 86 cents for 2013.
An Attractive Takeover Target
In a separate story, Health Management and peer
Community Health Systems Inc.
) disclosed a definitive merger agreement. Per the agreement,
Community Health will take over Health Management for about $7.6
billion (including the latter's debt of $3.7 billion) in cash and
stock. The acquisition is expected to complete in the first
quarter of 2014.
According to the terms of the agreement, Community Health will
acquire Health Management's issued and outstanding stock in cash
and CYH stock. Based on the closing price on Jul 29, the
valuation is adjudged as $13.78 per HMA share. This valuation for
each HMA share includes $10.50 in cash plus 0.06942 of a share of
CYH common stock.
The total cash and stock consideration for the acquisition
reflects an 8.3x multiple of trailing cash flow. Management of
Health Management asserts that the company will receive a higher
multiple than the most recent industry transaction. Following
closure, Health Management stockholders will own about 16% shares
of the combined entity.
Community Health management expects the transaction to have a
neutral impact on its earnings per share in the first year after
the completion of the acquisition. Thereafter, the acquisition is
envisaged to be considerably accretive to Community Health's
earnings per share.
According to Community Health, the acquisition of Health
Management is a coherent effort to gain from the health care
reforms in the U.S. (Affordable Care Act) and the attractive
industry dynamics. Further, the takeover is a strategic fit for
CYH as HMA's operating structure complements its business.
Community Health also expects to extend its geographic foothold
in the country on the back of this lucrative buyout.
In our opinion, the deal limits the upside potential of HMA stock
as it represents a 20.25% discount to the 52-week high share
price of $17.28. Our view is also reflected in the market trend
for Health Management as the stock price tanked 10.86% on Tuesday
as the news failed to boost investor optimism.
Stockholders also believe that the acquisition agreement
undervalues the stock. According to Gainey McKenna &
Egleston, the deal reflects a discount of almost 8% based on the
closing price of HMA stock on Jul 29.
At $13.30 (closing price on Tuesday), the stock has climbed over
40% higher year-to-date. Based on the closing price, the shares
remain 3.5% below the acquisition price tag.
A possible explanation for the takeover agreement might be that
of late, it has not been smooth sailing for Health Management as
it struggled with lower profits and sluggish market conditions.
Rising observation stays remain a cause of concern as it leads to
lower same hospital admissions for the company. Furthermore, the
quantum of debt on the balance sheet remains sizeable.
Given the preview of the quarterly performance, the
second-quarter results might fail to soothe fears. The expected
earnings per share and revenues for the second quarter lag well
behind the respective Zacks Consensus Estimate.
The company's operating statistics have been adversely affected
over the recent past. We believe that the slowdown in the
inpatient business is on account of lower growth in jobs in the
concerned markets. Although the acquisition is an effort to gain
from the healthcare reforms in the U.S. for the combined entity,
we prefer to remain on the sidelines as this consolidation effort
is currently plagued by uncertainties.
The stock carries a Zacks Rank #3 (Hold). While we tread with
caution for Health Management, we are positive about other
industry stocks such
VCA Antech Inc.
Vanguard Health Systems Inc.
). These stocks carry a Zacks Rank #2 (Buy).
COMMNTY HLTH SY (CYH): Free Stock Analysis
HEALTH MGT ASSC (HMA): Free Stock Analysis
VANGUARD HEALTH (VHS): Free Stock Analysis
VCA ANTECH INC (WOOF): Free Stock Analysis
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