Tara Bannow December 04, 2019
Quorum Health
could be the latest healthcare provider to be gobbled up by private equity
investors, if the beleagured chain accepts a buy-out proposal from
KKR.
The 24-hospital,
publicly traded company has struggled since it was formed in 2016, posting more
than $300 million in net losses in 2017 and 2018 combined. Quorum said it's
considering private equity firm KKR's offer to buy out its public shares held
by minority owners for $1 per share. That would value the company at about $33
million, based on the number of outstanding shares as
of Nov. 6.
"The fact
that they're being approached with a potential solution, I would think their
board would take that very serious, and it sounds like they are," said
Frank Morgan, an analyst with RBC Capital Markets.
The deal would
mean that Brentwood, Tenn.-based Quorum join the ranks of other privately held
hospital companies, such as Boston-based Steward Health Care.
Quorum's stock
fell 5.6% on Wednesday and has plummeted 80% in the past two years.
"The
company's board of directors will, together with its financial and legal
advisors, carefully consider this letter as part of its ongoing engagement with
its debt and equity holders," Quorum wrote in a statement.
KKR currently
owns more than 9% of Quorum's common stock, according to a letter the company wrote to
Quorum's board. The letter also said KKR is the largest holder of Quorum's
outstanding debt. It said the two companies have been in discussions over a
potential deal.
In addition to
the buy-out, KKR says the deal should include restructuring Quorum's debt,
equitizing the par value of the senior notes and injecting new capital by
raising equity from participating noteholders. New capital would be issued as
common stock in the recapitalized company and offered to participating
noteholders, the letter says. KKR declined to comment beyond the letter.
RBC's Morgan said
Quorum would benefit from having a strong financial partner as opposed to
having to renegotiate its debt covenants with banks on its own. He noted the $1
per share offer equates to about 8.4 times Quorum's projected 2019 earnings
before interest, taxes, depreciation and amortization.
"In today's world,
looking at it purely from a valuation perspective, that would seem to be pretty
good," he said.
Quorum, which
operates in rural and mid-sized markets, spun off from Franklin, Tenn.-based
Community Health Systems in April 2016. Since then, it's been working to sell
off underperforming hospitals to pay down its debt. The company had 38
hospitals when it was spun off.
Quorum has
struggled in recent years, posting a $200.2 million net loss in 2018 on
nearly $1.9 billion in net operating revenue, compared with a $114.2 million
net loss in 2017 on $2 billion in operating revenue.
Meanwhile, the
company's stock price has shed 73% of its value since the beginning of
the year, about 80% in the past two years. It's currently valued at 85 cents
per share.
Quorum's high
debt load and interest expenses severely constrain its cash flow, Moody's
Investors Service wrote in its November downgrade and negative
outlook for the company. Difficulty selling off hospitals and
implementing efficiency programs will limit Quorum's ability to improve its
near-term performance, the agency said.
KKR is among a
long list of private equity firms that have increasingly invested in healthcare
assets, especially physician specialty groups. There were 181 private equity
deals for all types of physician practices last year, according to a Bloomberg Law analysis.
KKR bought physician staffing company
Envision Healthcare Corp. last year in a deal valued at $9.9 billion in cash
and debt. Envision had previously been a public company.
Another physician
staffing firm, TeamHealth, was purchased by affiliates of the
Blackstone Group, one of the country's largest private equity firms,
in 2016.
More broadly,
healthcare assets attracted private equity investors at record levels last
year, with disclosed deal values surging almost 50% to $63.1 billion in 2018,
compared with $42.6 billion in 2017, according to an April report from Bain &
Company.
The outsized
presence of private equity in healthcare service companies is one reason
S&P Global Ratings tends to rate healthcare service providers lower than
medical device and pharmaceutical companies, the agency wrote in a January 2018
report. That's partly because of private equity owners' tendency to
aggressively use debt leverage. S&P noted that private equity investors
owned 60% of the health care services companies it rated at the time, compared
with just 10% of its pharmaceutical companies and 30% of healthcare equipment
companies.
Quorum announced
earlier this year it would outsource its revenue cycle
management to Chicago-based R1 RCM. Moody's said that change was one
factor behind its negative outlook for the company, as such moves come with
high execution risk. Another factor was the difficulty of divestitures and the
potential operating disruption that could come from migrating IT and other
systems away from the agreement Quorum still holds with CHS over the next 12 to
18 months.
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