Community Health Systems (CYH), Health Management Associates Inc (HMA), HCA Holdings Inc (HCA): Should Investors Participate in This Hospital Operator Acquisition?

Recently, Community Health Systems (NYSE:CYH) announced that it would acquire Health Management Associates Inc (NYSE:HMA) at $13.78 per share, with the total transaction of around $7.6 billion, including the assumption of around $3.7 billion in debt. The deal would be done via $10.50 per share in cash and 0.06942 of Community Health Systems (NYSE:CYH)’s shares for each of the Health Management Associates Inc (NYSE:HMA)’s share.

Health Management Associates Inc (NYSE:HMA)’s shareholders could also receive a contingent value right of up to $1 per share. Health Management’s Board has  approved the merger. However, Glenview Capital Management, Health Management’s major shareholder, thinks Health Management Associates Inc (NYSE:HMA) should be worth more.

The decent growth of Community Health and Health Management

Health Management Associates Inc (NYSE:HMA) seems to have an attractive hospital portfolio, operating 71 facilities with more than 11,000 beds in 15 states. With the non-urban focus in the southeastern U.S., it was considered a complementary geographic fit with Community Health Systems (NYSE:CYH). After the deal, Community Health Systems (NYSE:CYH) would expand its hospital footprint to around 206 facilities across 29 states in the U.S., which could allow the business to enhance economies of scale and improve operating efficiencies.

Historically, Community Health Systems (NYSE:CYH) has grown via acquisitions. Since 1996, the number of hospitals has grown from 36 to 135. In the future, the company would like to develop its integrated network further, focusing on clinical excellence to be successful in the ongoing healthcare reform.

Both Community Health Systems (NYSE:CYH) and Health Management Associates Inc (NYSE:HMA) have experienced significant historical grow. Health Management has managed to deliver 11.5% compounded annual growth in Earnings Before Interest, Taxes Depreciation and Amortization (EBITDA), from $623 million in 2008 to $963 million in 2012, while the EBITDA of Community Health has also been on the rise, from $1.52 billion to nearly $1.98 billion during the same period. The pro-forma EBITDA might come in at nearly $2.95 billion in 2012.

Potential synergies but highly leveraged deal

Community Health expects to realize as much as $150-$180 million in annual synergies within around 2.5 years, with more than 40% being realized in the first year. A further $150-$180 million in annual synergies could be realized via reducing overhead expenses and improving supply management, case management and revenue cycle management. The firm estimated that this transaction would be break-even in the first year. Investors might be worried about the high pro-forma leverage level at as much as mid-5 times debt/EBITDA. However, the company committed to de-leverage the balance sheet to return to the current level within 12-18 months after the deal was closed.