Community Health Systems Could Have Trouble Finding Strategic Buyers

On September 16, Bloomberg reported that Community Health Systems (NYSE: CYH)'s board was evaluating strategic alternatives, which included a sale of the company.

Baird’s Whit Mayo maintains a Neutral rating on the company, with a price target of $12.

Strategic Buyers Unlikely

“In our experience, there is generally some ‘purpose’ behind these leaks. We'd guess its plausible a sale could occur, but we struggle to see the math really supporting any value creating event,” Mayo mentioned.

The analyst pointed out that Community Health Systems had more than $15 million in debt, and the company’s market cap is now less than 10 percent of its total enterprise value.

Related Link: Community Health Systems Shares Drop On Exploring Options

In fact, Mayo does not expect any strategic buyers to emerge for the company.

“We'd guess some creative REIT structure could make sense, but the traditional opco/propco model seems even less likely. Any deal could take more equity to fund the opco vs. an outright LBO, and you'd lose the real estate,” the analyst explained.

‘Delevered’ Buyout

Mayo noted that an LBO structure would lead to a “delevered” buyout, explaining that assuming 6x leverage on EBITDA of $2.3 billion and equity of more than $2.5 billion would be required, which is almost twice Community Health System’s market cap, would be only 15 percent of the total transaction value.

“In our experience with these situations, most investors overestimate run-rate earnings and underestimate borrowing costs. Cynically, we're inclined to say Friday's development could suggest core trends carry more risk to worsen vs. stabilize,” the analyst added.

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