LV hospital owner Quorum is sold for $2.4 billion

Thursday, Oct. 19, 2000 | 10:58 a.m.

SUN STAFF AND WIRE REPORTS

Triad Hospitals Inc. of Dallas, which was spun off by HCA-The Healthcare Co. last year, today said it will buy Quorum Health Group Inc. for $2.4 billion in cash, stock and assumed debt to become the third-largest U.S. hospital company.

Brentwood, Tenn.-based Quorum is a partner in Las Vegas with Universal Health Services. They jointly own the Valley Health System, which includes Valley, Desert Springs and Summerlin hospitals.

Triad will pay $3.50 in cash and 0.4107 share for each share of Quorum. That values Quorum at $16.13 a share, 18 percent more than its closing price yesterday. Triad also will assume $1 billion in Quorum debt.

The acquisition will unite two former HCA units. Quorum, which this month tentatively settled U.S. allegations of fraudulent billing charges, was HCA's hospital-management division. Triad shares started trading in May 1999 after HCA, then known as Columbia/HCA, spun off its hospitals in smaller cities.

"We think this is a great deal," Triad Chief Executive James D. Shelton told analysts in a conference call. "It's going to make us a much better company and a much stronger company."

Triad said the transaction won't dilute its earnings in the first year and will add to earnings after that.

Triad also said the transaction is contingent on consent from HCA and a tax ruling from the U.S. Internal Revenue Service, both because of conditions in last year's spinoff. The company said it expects approval from both, though IRS approval could take 120 days.

Triad shares fell $7.50, or 24 percent, to $23.25 in late morning trading. Quorum fell $1.56, or 11 percent, to $12.06.

"It's far from a done deal. There are hurdles that need to be climbed. And it's a gutsy move on the part of the management," Credit Suisse First Boston Inc. analyst John Hindelong said.

After the purchase, Triad will have 53 hospitals and 14 surgery centers with revenue of about $3 billion. The combined companies will have 36,500 employees, and Quorum spokeswoman Shea Davis said no decision has been made on layoffs.

Triad has 31 hospitals, primarily in the U.S. Southwest and West. Quorum owns 22 hospitals and manages more than 200 others, making it the biggest U.S. manager of nonprofit hospitals.

The transaction would give Triad a bigger presence in the Southeast and Midwest. Quorum has strong hospitals in the Fort Wayne, Indiana, market.

Triad hasn't decided whether it will keep all of Quorum's hospitals or sell or spin off some properties, Shelton said. He said the company will have more to say on that in about a month.

The transaction is expected to be completed in the first half of 2001, the companies said.

Earlier this month, Quorum said it will pay $95.5 million to settle two civil fraud lawsuits with the U.S. Justice Department, which alleged that Quorum inflated cost reports and improperly shifted costs.

Quorum shares have risen 26 percent since July 31, when speculation began that it was looking for a buyer. On Aug. 11, Quorum said it hired Goldman, Sachs & Co. to sell or merge the company.

Triad said it can increase revenue growth at Quorum hospitals from about 4 percent to about 5 percent to 7 percent by adding services and working closely with doctors.

"Triad will do a good job managing the assets," said Jefferies & Co. Inc. analyst Frank Morgan, who has an "accumulate" rating on the stock. "Strategically it makes a lot of sense. It gives them a bigger base, a more diverse group of assets."

Triad, however, was downgraded today to "attractive" from "buy" by analyst Andrew Gitkin at PaineWebber Inc.

Quorum has been without a chief operating officer since June 1999 and hasn't paid enough attention to running its hospitals, Credit Suisse First Boston's Hindelong said.

Quorum said its profit rose 10 percent in the fiscal fourth quarter ended June 30, though it had higher costs for labor and supplies and lower admissions. The company said results improved after a year of lower payments from government and private health-insurance programs that led it to seek a buyer.

"It should ultimately be a good deal for them. But the question is getting from here to there," said Hindelong, who rates Triad a "buy."

Quorum reports earnings on Oct. 26, and Triad reports on Oct. 30.

Quorum shareholders will own about 49 percent of Triad's pro forma diluted outstanding shares after the transaction is completed. The venture capital firm Welsh, Carson, Anderson & Stowe, a major investor in Quorum, is supporting the sale and will own about 11 percent of the combined company.

Merrill Lynch & Co., which advised Triad, will underwrite the $1.7 billion of debt needed to fund the cash part of the acquisition as well as to refinance existing debt. Goldman advised Quorum.

HCA, the U.S.'s largest hospital operator, has 200 hospitals including two in Las Vegas.