Debt-ridden Community Health Systems Inc. (CYH - Get Report) is exploring its options with financial sponsors after getting pounded in the public markets, and while a leveraged buyout of the Franklin, Tenn.-based hospital company is a logical move and one that could garner both domestic and international interest, structuring a potential deal won't be an easy task.
Community Health said Monday, Sept. 19, that it is working with advisers as it explores various options with financial sponsors and other potential alternatives. The company said discussions are at a very preliminary stage and that no timeline has been set for the review.
Reuters reported Tuesday that Apollo Global Management (APO - Get Report) , the only PE group to put new capital into the sector as of late, is among the bidders eyeing the company. Apollo's Matt Nord told The Deal, a sister publication of TheStreet, on Friday that the firm's phone rings off the hook with different opportunities in the hospital sector. Apollo and Community Health couldn't immediately be reached Tuesday.
The Deal reported on Friday that large contrarian sponsors including the likes of Apollo, could view the challenges in the hospital sector as a buying opportunity, identifying Community Health, Quorum Health (QHC - Get Report) and LifePoint Health Inc. (LPNT) as possible LBO candidates.
Shares of Community Health retreated about 7.9% to $11.31 a piece during Monday's trading session, erasing some of Friday's 15.7% rally that followed rumors about a process. Prior to Friday, shares had lost more than 40% of their value since the Quorum spinoff was completed in April.
With the for-profit hospital system now publicly on the block, the big question is how a potential deal would be valued and structured given the company's approximately $15.4 billion in debt.
Given the leverage of Community Health, the pool of potential suitors is limited to multi-billion-dollar funds, or even a consortium of investors that could include both domestic and foreign players, a industry banker familiar with the company said.
Besides Apollo, large sponsors that have invested in the sector include Bain Capital, KKR & Co. (KKR - Get Report) , Blackstone Group (BX - Get Report) , Warburg Pincus, GTCR, TPG Capital, Cerberus Capital Management and Leonard Green & Partners. Outside of the U.S., Community Health could see interest from a foreign player the likes of OMERS Private Equity, the buyout shop unit of the Canadian pension fund, the Ontario Municipal Employees Retirement System, noted the banker.
Community Health will likely look at various creative structures, which may very well include monetizing its real estate, this person said, citing Apollo's RegionalCare Capella Healthcare as an example.
Apollo-backed RegionalCare Hospital Partners Inc. merged with Medical Properties Trust's (MPW - Get Report) Capella Healthcare Inc. in a March deal in which the latter netted $550 million in proceeds. In connection with the deal, the REIT agreed to fund sale-leasebacks of hospital properties added through acquisitions.
In order to arrive at a really decent return on equity for investors, Community Health would need to command a valuation close to $18 billion to $19 billion, "and that's going to be really hard," Sheryl Skolnick of Mizuho Securities USA said.
In the most likely scenario, Skolnick predicts Community Health would fetch $7.31 per share of residual equity value in what she described as a theoretical liquidation. In a non-distressed sale scenario, she predicts the hospital operator would command $9.81 per share.
Skolnick's method of determining a potential valuation for Community Health was done by examining the company on a hospital-by-hospital basis using data available from the American Hospital Directory.
An outright sale of Community Health to a strategic buyer is "virtually impossible," Mizuho's Skonick said, noting, "I don't think there's anyone out there that would be willing to sacrifice a model that works to buy a model that doesn't."
If there were a strategic buyer out there, Skonick said she would worry more about a takeunder, which refers to an offer to acquire a company at a price per share that falls below its current market price. That said, she added that it's possible a Tenet Healthcare (THC - Get Report) , HCA Holdings (HCA - Get Report) or LifePoint could engage in a creative deal structure that would enable it to acquire a chunk of Community's assets to fill in any holes they might have.
Other strategic alternatives beyond a sale-leaseback or a piece-meal sale include a spinoff of the Community Health's HMA assets, according to Skonick.
Community Health revealed in early August that it was working to sell a dozen unidentified hospitals, having announced in May it was shopping 10 of those. CEO Wayne Smith said it expects the bucket of assets to fetch $850 million in total proceeds.
The process is moving slowly not because the assets are bad facilities, but because the company is primarily in discussions with not-for-profit buyers, which are much more cautious, the unnamed source said.
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