Community Health Systems Inc., the second-largest U.S. hospital chain, said it has agreed to buy Health Management Associates for $3.9 billion in cash and stock. Health Management fell in early trading after announcing it got additional subpoenas from regulators on its practices.

Health Management holders will receive $13.78 a share, the companies said in a statement today. That’s 7.6 percent below yesterday’s closing price. Investors also will get a contingent value right that may add as much as $1-a-share based on the outcome of legal matters, the companies said.

The sale came amid pressure from Glenview Capital Management LLC, which owns about 15 percent of Health Management stock. Glenview proposed ousting the Naples, Fla.-based company’s board and management because of its “substandard strategic and financial approach.” After the deal closes, Franklin, Tenn.-based Community Health will operate about 206 hospitals in 29 states.

“Community is a very acquisition-driven company and HMA is the right fit from a market perspective,” said Sheryl Skolnick, an analyst with CRT Capital Group LLC, in Stamford, Conn., in a telephone interview today. Health Management “was not in a position” to turn down a deal, she said.

Including assumed debt of $3.7 billion, the purchase is valued at about $7.6 billion, the companies said. The offer values Health Management’s equity and net debt at 8.3 times its earnings before interest, taxes, depreciation and amortization for the last 12 months, according to data compiled by Bloomberg.

Subpoenas Received

Health Management fell 8 percent to $13.70 at 8:50 a.m. in pre-market New York trading. The company said today in a statement that it received subpoenas regarding certain emergency room operations that supplement earlier ones from 2011. On June 12, the hospital chain received another subpoena regarding physician relationships.

The acquisition “is going to be the only realistic option for shareholders,” Skolnick said. “To reject this deal means the stock is going to go down, the fundamentals are so bad. What will a knowledgeable buyer pay for your assets? You got the answer, less than the stock market.”

The companies said they expect to complete the transaction by the end of the first quarter of 2014. Scott Tagliarino, a spokesman for Glenview Capital, declined immediate comment.

This is the biggest takeover of a hospital company since 2006, when HCA Inc. was acquired by buyout firms including KKR & Co. for about $33 billion including debt, according to data compiled by Bloomberg.

‘Strategic Opportunity’

The deal also reflects continuing consolidation in the hospital industry to meet the anticipated needs of millions of Americans expected to gain medical coverage under the U.S. health-care overhaul. State exchanges where the uninsured can obtain medical insurance are scheduled to open Oct. 1 for plans that take effect Jan. 1, when the Affordable Care Act requires most Americans to carry insurance.

Wayne T. Smith, chairman, president and chief executive officer of Community Health Systems, said in a statement that the agreement “provides a strategic opportunity to form a larger company with a diverse portfolio of hospitals that is well positioned to realize the benefits of health care reform and to address the changing dynamics of our industry,” said

Health Management runs 71 hospitals, about a third of which are in Florida, with about 11,100 beds. The company reported $5.88 billion in revenue last year. Community Health owns, leases or operates 135 hospitals with about 20,000 beds, and the company posted $13 billion in net revenue in 2012.

Biggest Operator

HCA Holdings, with 162 hospitals and 113 freestanding surgery centers in 20 U.S. states and England, remains the biggest for-profit U.S. hospital chain. HCA generated $33 billion in revenue last year.

BofA Merrill Lynch and Credit Suisse are acting as financial advisers to Community Health, and Kirkland & Ellis LLP is acting as its legal advisor. Morgan Stanley & Co. LLC is acting as financial advisor to Health Management, and Weil, Gotshal & Manges LLP is acting as its legal advisor.


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