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The Deal

) -- Hospital operator

Community Health Systems

(CYH) - Get Community Health Systems, Inc. Report

, seeking to bulk up in the face of health care reform, said Tuesday, July 30, it would acquire smaller rival

Health Management Associates


in a deal valued at $7.6 billion cash, stock and debt.

Terms of the deal call for Franklin, Tenn.-based Community to pay $10.50 in cash and 0.06942 of its shares for each Health Management share for total consideration of $13.78. The offer price is about 7.6% below Health Management's Monday close of $14.92, and would value the equity of the Naples, Fla.-based target at about $3.9 billion.

The deal also provides Health Management investors with a contingent value right that could pay them as much as $1 per share in additional value based on the outcome of certain legal matters. Health Management, which has been under legal scrutiny over billing practices since 2011, said Tuesday it had received additional subpoenas regarding certain emergency room operations.

Post-deal, Health Management holders would own about 16% of the shares of the combined company, which would own or operate 206 hospitals in 29 states, with more than 31,000 beds.

Community Health chairman and CEO Wayne T. Smith in a statement said that the deal would create a company with a diverse portfolio of hospitals that is "well positioned to realize the benefits" of health care reform and other industry changes.

"Our complementary markets and the ability to form networks in key states, along with the synergies that will be available to us, can create value for the shareholders of our companies, the communities we serve, our employees and medical staffs," Smith said. "We look forward to working with the physicians and employees of HMA to advance the commitment shared across both organizations to pursue clinical excellence and to deliver quality care for patients."

Health Management, which was under pressure from 14.6% investor

Glenview Capital Management

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to seek a buyer, has been evaluating options since late 2012. Company chairman William J. Schoen in a statement said that the deal is priced above other health care deals in terms of its multiple to trailing cash flow, and marks a "significant premium" to the company's share price prior to word of a potential sale was made public.

Shares of Health Management traded at below $11 apiece as recently as April, and at year's end was below $10.

"Shareholders will receive immediate value in cash, as well as CHS stock that will allow them to participate in the future growth of a true industry leader," Schoen said. "We are pleased that this combination will create an even stronger organization for the benefit of our patients, physicians, associates and the communities we serve."

The deal, which is subject to the approval of 70% of Health Management's shares but no financing conditions, is expected to close by the end of the first quarter of 2014. Community Health said it has received financing commitments from

Bank of America Merrill Lynch

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Credit Suisse

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to complete the deal.

Brian McCarthy of BofA Merrill Lynch and Credit Suisse's Stuart Smith are advising Community Health along with

Kirkland & Ellis's

Steve Fraidin, Thomas Christopher and Michael Brueck. Morgan Stanley's Rob Kindler, Tedd Smith and Andrew Bhak provided Health Management with financial advice, with a

Weil, Gotshal & Manges

team led by partners Michael Aiello and Matthew Gilroy providing legal counsel.

Written by Lou Whiteman.