Community Health Ready for Healing

The big hospital chain sells assets to rebuild its balance sheet after the mammoth Triad purchase.
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Following a big-ticket purchase,

Community Health Systems

(CYH) - Get Report

is ready to pay down some debt this holiday season.

Late Tuesday, Community announced its first major asset sale since becoming the nation's largest publicly traded hospital chain. The Franklin, Tenn., company will shed nine hospitals, collecting $315 million in proceeds, as it seeks to rebuild its balance sheet after this year's multibillion-dollar purchase of Triad.

Community expects to turn over the hospitals to privately held Capella Healthcare by the end of January.

Community's shares were climbing 7.3% to $33.02 following the news.

The deal will trim Community's hospital count, currently at 128, by roughly 9%. It includes more facilities -- but at a cheaper price -- than some analysts had anticipated.

"The sale price is a relatively low valuation compared to that implied by the purchase price for all of Triad," observed Cowen analyst Kemp Dolliver, who has a neutral rating on Community's stock. "The package includes a mix of highly profitable hospitals and unprofitable hospitals."

Looking ahead, "additional divestitures remain possible," Dolliver added.

Critics have

felt nervous about Community's ambitious buyout of Triad from the start. With that deal, Community shifted away from its proven strategy of buying rural hospitals -- which often monopolize their markets -- in small, manageable transactions.

By purchasing Triad, the company wound up with many urban hospitals facing stiff competition instead. It assumed a huge debt load, totaling more than $9 billion, to boot.

Moreover, Community executed the deal in an especially tough industry environment, as hospitals struggle with falling admissions and rising bad debts from the uninsured.

"CYH has proven themselves as the most talented operators and consolidators of facilities in the hospital industry," said Longbow Research analyst David Bachman, who has a neutral rating on the company's stock. "However, we view the TRI acquisition with caution as we believe that geography, payer mix and patient acuity -- compounded by differences in corporate cultures -- will slow progress towards improved revenue and margins in the TRI portfolio."

Thus, he added, "we are maintaining a wait-and-see perspective" on the company.

Bulls Applaud

But one of Wall Street's most celebrated hospital analysts has long portrayed Community as an attractive company in an otherwise ugly group. Credit Suisse's Ken Weakley -- who has been applauded for his early warnings on

Tenet

(THC) - Get Report

and the industry as a whole -- continues to stand by his favorite pick.

He saw Community's asset sales as a fresh reason to cheer.

"As stated in prior research, CYH management has a history of quickly reducing its leverage," he wrote on Tuesday. "The sale of assets that will not provide expected (profit) expansion is the most efficient means to reduce debt.

"We are impressed with the swift action that management has taken, just months following the execution of the TRI acquisition."

Community has decided to sell four hospitals in Alabama, two in Arkansas and one each in Missouri, Oregon and Tennessee. The facilities, ranging in size from 60 to 170 beds, generated approximately $420 million in revenue over the course of the past year.

While Triad is now selling those hospitals for less than one times their annual revenue, Deutsche Bank analyst Darren Lehrich believes that the company has negotiated a fairly attractive deal.

Importantly, Lerhich stressed, Community managed to find a buyer -- and that buyer managed to secure financing -- despite the tough credit environment. Lehrich expressed growing optimism about Community's ability to de-leverage its balance sheet as a result.

"On the heels of four previously announced joint-venture divestitures ... we believe CYH will have generated $450 million to $500 million in proceeds including the (current) deal," he wrote on Tuesday. "As such, this deal brings CYH closer to its goal of $750 million in asset sales during year one of the Triad deal."

Moreover, he added, "we believe a package of five to 10 more hospitals could be in the cards in 2008."

Lehrich has a buy recommendation and a $47 price target on Community's stock. His firm owns at least 1% of Community's stock, plus a "significant non-equity financial interest" in the company.

Even before this week's asset sales, Weakley pointed out that Community has already delivered some pleasant surprises to investors. He suggested that the company, and its stock, deserves more credit as a result.

Weakley has an outperform rating and a $52 price target on the shares. His firm has investment banking ties to the company.

"We believe that the integration of Triad is ahead of plan, that the fears about Triad's pending collapse have been overly dramatic and that CYH's integration skills have been ignored," Weakley declared earlier this month. "We continue to believe that the Triad turnaround should be manageable, if by no means riskless, for the accomplished CYH team and that significant efforts to de-leverage will occur in the next two to three years."

He ultimately sees the Triad purchase as "a deal that works" in the end.