Wall Street analysts yesterday hailed the proposed $7 billion merger combining Hospital Corp. of America, the nation's largest for-profit hospital chain, and American Hospital Supply Corp., the nation's largest provider of hospital suppliers.
Analysts said the combination that will create the world's largest health-care provider makes both financial and strategic sense for both companies, given the changing economics of the health-care field.
In an era when the government is trying to hold down medical costs by replacing the old Medicare cost-plus reimbursment system with fixed-fee schedules, and employer-provided insurance programs are trying to hold down costs by discouraging long hospitals stays and expensive procedures, the profitable survivors in the hospital management field will be companies that control their operating expenses.
By acquiring American Hospital Supply, which distributes more than 130,000 medical products, Hospital Corp. will be able to cut its operating expenses by drastically reducing its supply costs. Supplies are Hospital Corp.'s third largest operating expense after salaries and benefits.
Unlike many recent takeovers that have relied heavily on debt-financing and led to weaker balance sheets, this combination would produce a stronger balance sheet. Prior to the merger, Hospital Corp. had expected to end 1985 with a debt-to-total capital ratio of about 55 percent; following completion of the deal, Hospital Corp. expects to reduce its debt to total capital ratio to 38 percent.
Ironically, Hospital Corp. will be able to be more aggressive in making acquisitions of hospitals and related companies, rather than cutting back on growth, after the merger, because it will have increased financial flexibility.
Wall Street analysts are predicting this deal may lead to a new round of mergers in the health-care field as others strive to compete with the new giant.
Under terms of the merger agreement, which still must be approved by stockholders of both companies, each share of American Hospital Supply stock will be worth three-quarters of a share in the new company, while each share of Hospital Corp. stock will be worth one share. No cash will be exchanged, and the stock swap is tax-free to shareholders of both companies.
The boards of directors of both companies unanimously approved the deal late Saturday.
American Hospital Supply Chairman Karl D. Bays will be chairman of the new company, and Hospital Corp. President Thomas F. Frist, Jr., will be president.
The current chairman of Hospital Corp., Donald S. MacNaughton, formerly chairman of the Prudential Insurance Co., is not expected to play an active role the new arrangement.
The company will have its headquarters in Nashville, but is expected to maintain American Hospital Supply's Evanston, Ill. offices.
Hospital Corp. manages more than 420 hospitals and other health facilities in the United States and seven other countries.
The company also has close relationships with many university hospitals which it manages.
Analysts said yesterday American Hospital Supply's relationships with hospitals throughout the world will open the door for new Hospital Corp. acquisitions.