Mergers and acquisitions are a normal aspect of the stock market, but every so often one will be so far out in left field that it makes me literally want to bang my head against the wall. Normally, this is because I feel one company is getting the short end of the stick, but this week we've been truly blessed with the holy grail of all head-bangings.
News broke after the bell Thursday that Community Health Systems
Community Health Systems has not been shy about growing by acquisition. Over the past five years, it has made 15 acquisitions, which it has financed predominantly through debt offerings. But that debt will eventually come due; as of its most recent quarterly financial report, Community Health has nearly $9 billion in long-term debt, with more than 80% of it due within the next five years. Though Community Health remains profitable, it must devote a sizable portion of its cash flow to pay the interest expense on this debt.
Not bad enough? What if I told you that Community Health has seen admission growth in its hospitals drop for eight consecutive quarters due to weakness in the economy? If successful, the buyout of Tenet would create not only the second largest hospital chain in the nation -- but a behemoth with potentially $13 billion in debt. Tenet has struggled with several years of negative free cash flow, so an acquisition could put more pressure on Community Health in managing the interest payments on that debt.
What could be worse? Tenet Healthcare rejected the offer, citing a rampant undervaluation of the company by Community Health. How a company with numerous Medicare scandals and financial restatements over the past decade can demand a higher price tag is beyond me.
In Tenet's latest quarterly filing, total admissions were down 3.5%, with charity care admissions posting the biggest rise. Until very recently, net margins were low and often negative. Nearly all of the operating cash the company generates goes toward interest payments. Contrast this with Lifepoint Hospitals
Hit head here
Community Health can talk all day about the synergies that both companies would benefit from if this merger were to go through, but in my view, this has all the makings of the goldfish getting swallowed by the cat, and the cat choking on the goldfish. I see two poorly managed companies here, and two poorly managed companies can't somehow combine to create a good company.
Now, where's that wall?
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Fool contributor Sean Williams does not own shares in any companies mentioned in this article. He owes all his inspiration to Robin Hood: Men in Tights for the cat and the goldfish reference. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.