Community Health Systems Inc. (CYH - Get Report) has made it clear that it wants to control its own destiny, adopting a poison pill after a Chinese billionaire recently upped his stake to nearly 14% in the rural hospital operator currently engaging in preliminary talks with private equity sponsors.
Perhaps most notable is that investors barely reacted to the announcement. The company, which has already publicly disclosed it is entertaining possible transactions with private equity, has now implemented a defensive tactic that is typically used to discourage a hostile takeover or encourage shareholders to purchase shares at a premium. Yet the stock actually lost some value Tuesday.
Shares of Community dipped about 1.2% to $11.18 a share midday. After an initial spike to $12.29 a share on Sept. 16 when rumors first emerged around Community, the stock quickly corrected and has since remained relatively flat.
"This is really quite an extraordinary circumstance," Sheryl Skolnick of Mizuho & Co. said in a Tuesday phone interview.
Skolnick attributed the unusual lack of shareholder reaction in the public markets to a very high level of skepticism that a private equity-backed buyout of Community is actually feasible, and if it is, that it could be done at a premium.
The six-month rights agreement adopted by the Franklin, Tenn.-based for-profit hospital system will take effect should any stockholder accumulate a 15% or greater interest in the company.
The announcement comes after Community, led by CEO Wayne Smith, on Aug. 19 confirmed that it has enlisted the help of advisers to explore strategic options with financial sponsors, among other avenues.
And while the poison pill is not in response to any "specific effort to acquire the company or influence its management," the statement released Monday after the close of regular trading does cite the recent accumulation of a significant block of its stock—undoubtedly a reference to Tianqiao Chen, who via his investment company Shanda Investment Group Ltd. has built up a 13.8% interest in the company.
Chen's firm became the company's largest shareholder on Aug. 18, when it initially disclosed an approximately 10% stake in Community.
"They [Community] don't want him to accumulate more to the point where he would be able to influence what they'd be doing," Brian Tanquilut of Jefferies LLC said Tuesday. "They want to be driving the strategy."
Chen, the co-founder, chairman and CEO of Chinese gaming group Shanda Interactive Entertainment Ltd., isn't known as an activist investor, and that's not likely to change with Community, Tanquilut noted.
While it remains difficult to ascertain the investor's intentions, continued accumulation of the stock by Shanda or anyone else that might be an interested party can't be ruled out, Skolnick said, noting that deep value investors could see the opportunity in its underperforming real estate assets.
With minimal room to lever up Community's current balance sheet, Jefferies Tanquilut added that the only way to achieve a higher valuation for certain assets would be to pursue a series of divestitures or piece-meal sales.
As previously reported by The Deal, large contrarian sponsors such as Apollo Global Management (APO - Get Report) , the only PE group to put new capital into the sector as of late, could view the challenges in the hospital sector as a buying opportunity.
While the advisers working with Community on the strategic review have not been disclosed, Credit Suisse AG advised the company on both its spinoff of Quorum Health Corp. (QHC - Get Report) completed earlier this year as well as on its $7.6 billion deal for Health Management Associates Inc. completed in January 2014. Bank of America Merrill Lynch also provided financial advice on the HMA deal.
Community Health on Sept. 29 announced an agreement to divest four rural hospitals, three in Mississippi and one in Florida, to not-for-profit healthcare system Curae Health Inc., for an undisclosed price.
The company in early August had said it was working to sell a dozen unidentified hospitals, having announced in May it was shopping 10 of those. CEO Smith said it expects the bucket of assets to fetch $850 million in total proceeds.