Community Health to buy Health Management for $3.9 billion

(Reuters) - U.S. hospital chain Community Health Systems Inc said on Tuesday that it would buy smaller Health Management Associates Inc for $3.9 billion to increase its base during the overhaul of the country's healthcare system.

Both companies' hospitals are primarily in smaller cities and rural areas. Health Management has a strong presence in the U.S. Southeast, including Florida. Community Health is the second-largest for-profit chain behind HCA Holdings Inc .

Community Health said that based on Monday's share prices, it would pay $13.78 per share in cash and its own stock. The deal would give Health Management shareholders a 16 percent stake in the new company and an additional contingent value right worth up to $1 per share.

Health Management shares fell 6.9 percent to $13.89 before the market opened, while Community Health rose 2.4 percent to $48.35.

The contingent value right payment depends on the outcome of certain legal proceedings, the companies said in the statement, but they did not provide further details and were not immediately available for comment.

Health Management cut its earnings outlook in April, citing weak patient admissions. The company in December was the subject of a "60 Minutes" television news story that described aggressive policies aimed at increasing admissions. Health Management denied the allegations.

In its first-quarter financial filing, Health Management said it had received a subpoena from the U.S. Securities and Exchange Commission for documents involving accounts receivable, billing write-downs, contractual adjustments, reserves for doubtful accounts, and revenue.

In a separate statement in which Health Management forecast second-quarter earnings of 10 cents to 11 cents a share due to weak hospital admissions, it said that it received additional subpoenas from the U.S. Department of Health and Human Services about emergency room operations that supplemented ones received in 2011. It also received an additional subpoena on physician relationships.

Health Management also had faced a looming proxy fight with hedge fund Glenview Capital Management, which wanted to replace the entire board. In June, Health Management said it had hired Morgan Stanley and law firm Weil, Gotshal and Manges to consider its response to Glenview's campaign.

Glenview, which owns 14.6 percent of Health Management, said in a June letter to the hospital operator that there was "significant room for improvement" at the company, which it said had fallen short in its financial performance for more than a decade.

Health Management Chief Executive Officer Gary Newsome was due to retire at the end of the month. On Tuesday the company said John Starcher would be interim president and CEO.

The Community Health deal is the second major hospital merger agreement in as many months as the companies, faced with declining patient admissions and rising bad debts, struggle to shore up their finances as they await an expected influx of newly insured patients beginning next year under healthcare reform.

Last month, No. 3 hospital chain Tenet Healthcare Corp announced a deal to buy Vanguard Health Systems Incfor $1.73 billion.

Community Health, based in Franklin, Tennessee, on Monday reported a drop in second-quarter profit due to weak admissions and a rise in bad debt.

The boards of both companies have approved the deal, which they expect to close by the end of March.

Community Health said it had a financing commitment from its advisers on the deal, Bank of America Merrill Lynch and Credit Suisse . Kirkland & Ellis also advised the company.

(Reporting by Susan Kelly in Chicago and Caroline Humer in New York; Editing by Gerald E. McCormick, Jeffrey Benkoe and Lisa Von Ahn)

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