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Community Health to buy Health Management for $3.9 billion

By Susan Kelly and Caroline Humer

(Reuters) - U.S. hospital chain Community Health Systems Inc said on Tuesday 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.

Health Management on Tuesday also disclosed it had received additional subpoenas in a widening federal government investigation of its admissions practices. The troubled company also named a new CEO on Tuesday.

The Community Health deal, which the market had been anticipating, is the second in the sector in as many months. Faced with declining patient admissions and rising bad debts, companies are struggling to shore up their finances as they await an expected influx of newly insured patients beginning next year under healthcare reform.

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 , mostly spread across the Southeast, Midwest and Southwest.

The combined company would have 206 hospitals across 29 states. "HMA's geographic footprint is complementary to ours. They are in different markets that give us a chance to expand into new communities," Community Health Chief Executive Wayne Smith said on a conference call.

Community Health said that based on Monday's share prices it would pay $13.78 per share in cash and its own stock. Health Management shareholders would own a 16 percent stake in the new company and get an additional contingent value right worth up to $1 per share that depends on the outcome of a government probe of admissions practices at Health Management.

Health Management shares fell 11.1 percent to $13.26, while Community Health dipped 0.4 percent at $47.03.

Deutsche Bank analyst Darren Lehrich said the acquisition could potentially add 20 percent to 30 percent or more to Community Health's earnings per share in 2015.

Community Health expects to achieve breakeven earnings in the first year after the deal closes and would cut costs between $150 million and $180 million annually within two-and-a-half years.

Separately, Health Management on Tuesday forecast weaker-than-expected second-quarter earnings of 10 cents to 11 cents a share due to lower hospital admissions.

It also said it received additional subpoenas from the U.S. Department of Health and Human Services about emergency room operations after getting subpoenaed in 2011. It also received an additional subpoena on physician relationships.

Health Management has also received a subpoena from the U.S. Securities and Exchange Commission over accounts receivable, billing writedowns, contractual adjustments, reserves for doubtful accounts and revenue.

Health Management cut its earnings outlook in April, citing weak patient admissions. In December, it was the subject of a story on the "60 Minutes" CBS television program that claimed it used aggressive policies to boost admissions. Health Management denied the assertions.

Health Management has also faced a looming proxy fight with hedge fund Glenview Capital Management, which wanted to replace the entire board. Health Management has hired Morgan Stanley and law firm Weil, Gotshal and Manges to help respond to Glenview's campaign.

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

Health Management CEO 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.

'VERY DIFFICULT TIME'

"This industry is having a very difficult time, if you haven't noticed, in terms of our earnings," Community Health's Smith told analysts.

Last month, No. 3 hospital chain Tenet Healthcare Corp said it was buying Vanguard Health Systems Inc for $1.73 billion.

Community Health, based in Franklin, Tennessee, reported a drop in second-quarter profit on Monday due to weak admissions and a rise in bad debt. Earlier this month, it said it had received an additional subpoena related to a Justice Department investigation of short-stay admissions from emergency departments.

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

(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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