April 22, 2008 in City

Empire Health’s value erodes

By The Spokesman-Review
 

By the numbers

•$172 million: Community Health Systems’ original offer for two Empire Health Services hospitals

•$156 million: New purchase price

•$84 million: Proceeds available for a new charitable coundation, down from $100 million

•$7.1 million: Empire’s posted operating losses last year

Financial losses and troubled national credit markets have lowered the value of Empire Health Services and trimmed the $172 million that Community Health Systems Inc. is offering for Empire’s two hospitals.

Proceeds available for a new charitable foundation would be lowered to $84 million – down from the $100 million Empire’s board estimated when originally striking the deal.

The new purchase price of $156 million could fall further if Empire’s financial woes worsen.

The Spokane organization posted $7.1 million in operating losses last year, though board chairman Ron McKay said Monday that the hospitals’ recent layoffs and restructuring have returned Deaconess Medical Center and Valley Hospital and Medical Center to profitability.

The price adjustment will not affect other aspects of the buyout, including Community’s pledge to spend $100 million on hospital remodeling and technology upgrades within five years; plans to retain all hospital workers at their current salaries; and the amount of money needed to retire debt.

The pending sale must pass state regulatory scrutiny. If successful, the sale could be completed by early autumn, Empire and Community officials have said.

The drop in value reflects the state of U.S. capital markets, said Carsten Beith, managing director of Cain Brothers’ San Francisco office. Empire hired the firm to broker the deal with Community, the nation’s largest hospital operator with 130 medical centers in 28 states.

Beith said Community is sensitive to the national economy. Though it secured the money to buy Empire before the credit market tightened, Community also is trying to sell some of its hospitals to begin repaying money borrowed to fund last summer’s $6.8 billion takeover of Triad Health.

Prospective buyers of those hospitals may have more difficulty now securing enough money, pushing the sale prices downward.

“This has reduced across the board valuations of hospitals,” Beith said.

Both McKay and Beith said the new price remains within the fair market value of century-old Empire.

“It affirms Community’s interest in the acquisition,” McKay said.

In remarks to financial analysts two months ago, Community Health Chief Executive Officer Wayne Smith dismissed the deterioration of Empire’s business operations as an expected development.

“We are buying almost $300 million of revenue for about $160 million, so we have a very favorable purchase price,” Smith said, according to transcripts of the call. “But it’s never over till it’s over. So you don’t know what might be the final number, when it’s all said and done, and we will just try to judge that along the way.”


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