Obamacare Drives HMA and Community Health Merger

Corrected to reflect Glenview holding of Tenet Healthcare shares.

NEW YORK ( TheStreet) -- Health Management Associates ( HMA) is attempting to sell itself to competitor Community Health Systems ( CYH), as the struggling hospital operator tries to ward off a proxy campaign waged by its largest shareholder, hedge fund Glenview Capital Management.

Community Health has offered to pay $10.50 a share in cash and 0.06942 of a share for each share of H.M.A, valuing the company at about $13.78 a share, based on Monday's closing stock prices. H.M.A shareholders will also receive a contingent value right worth up to $1 a share if the hospitals network can resolve legal issues tied to its patient admission practices.

H.M.A's proposed sale to Community Health values the firm's shares at $3.6 billion and comes amid a merger wave among hospital and health care giants. Whether shareholders approve the deal, however, remains uncertain. About 70% of investors have to approve the terms of the Tuesday merger.

Glenview, a 15% shareholder in H.M.A said late on Tuesday afternoon it considers the merger proposal a "floor value" for the company and will continue to press for a set of management and operational changes.

"Glenview believes that the Community Proposal establishes an important floor value for HMA shareholders to evaluate," the firm said in a Tuesday statement.

"Given the management turnover and deterioration of performance under the sitting Board we believe it is imperative that shareholders promptly replace the sitting Board with the Fresh Alternative nominees."

In late 2012, Glenview Capital Management became a top H.M.A shareholder and has campaigned for the company to consider strategic alternatives such as a sale. The hedge fund also recently proposed a slate of board directors to replace the company's existing management.

As part of Tuesday's proposed merger, H.M.A said it has ended a strategic review it began earlier in 2013. The company also said it has named John M. Starcher interim CEO to replace William J. Schoen.

While Glenview Capital Management may not see the terms of Tuesday's merger as attractive for H.M.A shareholders or the company's strategic review as particularly successful, it nonetheless may stand to benefit from the deal.

In Tuesday trading H.M.A shares fell nearly 11% to $13.30. Community Health shares fell 3.49% to $45.58.

If shareholders such as Glenview approve H.M.A's sale to Community Health, the merger will create a hospital network of 206 hospitals in 29 states, many of which are in rural areas. Community Health also said on Tuesday it expects the merger to have a neutral impact on its earnings per share in the first year following the close of the transaction but for the deal to be "significantly accretive" thereafter.

For Glenview, even a merger priced at a "floor value" may prove to be a large windfall.

H.M.A shares have gained over 100% in 2013, amid speculation the company could be an acquisition target as hospitals use consolidation to position for the implementation of the Affordable Care Act or "Obamacare." Community Health shares, meanwhile, have gained over 50% year-to-date.

Already, Glenview has profited from health care industry M&A in 2013. The firm was a shareholder in Tenet Healthcare ( THC) when it acquired Vanguard Health Systems ( VHS) in a deal that boosted both firm's shares.

Expecting a wave of consolidation among hospitals, outpatient facilities, health care providers and pharmacy benefit managers, Glenview has made the sector its biggest bet in a stock portfolio that exceeds $10 billion, according to Bloomberg data.

The fund's two top holdings are leveraged to the health care sector. Seven of the Larry Robbins-run Glenview top-10 holdings are in the health care space, which is expected to grow dramatically in the wake of ACA, commonly known as Obamacare.

"This deal is part of a growing wave of hospital consolidation, as hospitals seeks ways to diversify and lower costs in anticipation of a sea change occurring in the healthcare industry with the implementation of the Affordable Care Act, uncertainty over how states will handle Medicaid coverage and reimbursement, and Medicare changes," George Paul, a White & Case Antitrust Partner, wrote in an e-mail.

Paul notes that while both companies have operations in 29 of the same states, the Federal Trade Commission may see little overlap in their operations on a local level, minimizing antitrust issues.

Glenview saw a significant profit after the genetic sequencing machinery specialist Life Technologies ( LIFE) was acquired by Thermo Fisher Scientific ( TMO). Manufacturers such as Life Technologies and Illumina ( ILMN) are working to build lower-cost sequencing machines that can be used in individual cancer treatment.

The hedge fund counts stakes in McKesson ( MCK), Tenet, Community Health Systems ( CYH), Humana ( HUM) and HCA Holdings ( HCA) as other large holdings. Glenview is also an investor in Cigna ( CIG), Thermo Fisher Scientific ( TMO), Walgreens ( WAG) and Hospira ( HSP).

Under Obamacare, health care insurance coverage is expected to dramatically expand and impact states such as Texas that lag the nation in overall coverage. For hospital chains, the increase in coverage may mean an expansion into new markets, while it could also lead to a reduction in bad debt expense.

The legislation has sent ripples across the health care industry. Some estimate that between 16 million to 20 million new Americans will be eligible to enroll in Medicaid through Obamacare, a change that's already prompted the merger of WellPoint ( WLP) and Amerigroup ( AGP) and a tie-up between Aetna ( AET) and Coventry Healthcare ( CVH).

Pharmacy benefit managers such as Express Scripts ( ESRX), CVS Caremark ( CVS) and Walgreens, meanwhile, have used mergers to expand their networks in anticipation of changes to the cost structure of prescription drug plans.

Glenview is positioned for further consolidation of the health care sector, as Obamacare kicks in and impacts sector-wide earnings and strategy.

It remains to be seen whether shareholders will support a change program advocated by Glenview or if they will agree to take a payout in the form of Tuesday's proposed merger.

Glenview's Obamacare M&A Bet

-- Written by Antoine Gara in New York

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