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Community Health’s No. 1 shareholder turns activist

March 13, 2017

Chinese billionaire Tianqiao Chen, the largest shareholder of Community Health Systems, signaled Monday that his passive investment in the struggling hospital chain could turn activist.

In a regulatory filing Monday, Chen noted that the 15.6 million shares of CHS that he and his wholly owned Shanda affiliates have accumulated over the past year were bought as a passive investment.

But Chen’s new filing was a 13D, connoting intent to possibly get involved in company governance, rather than the passive 13G filings he had made while building his 13.7% stake in CHS. That stake cost Shanda about $185.6 million, he said in Monday’s filing.

The disclosure means that Chen could request board seats or otherwise get involved in CHS operations to hasten the turnaround of the company or promote its sale. It also comes shortly before the expiration of a “poison pill” that CHS put in place last year against a hostile takeover.

The switch from a purely passive investment to the 13D marker was made “in order to maintain flexibility going forward consistent with a conservative approach to disclosure,” Chen said in the filing.

Shanda representatives could not be reached immediately for comment.

In October, Chen told Modern Healthcare that he was not interested in buying CHS, the nation’s second-largest investor-owned hospital company behind HCA Holdings. The Singapore-based entrepreneur, who made his initial fortune in online gaming, accumulated CHS shares throughout 2016 at about $10 per share when they cost four times that in 2015 before the company’s earnings collapse.

CHS was Chen’s first brush with the U.S. healthcare system, though he is a major donor to health organizations in China.

The filing of 13D disclosures often lead to the investing company requesting board seats, management changes and sometimes the sale of a target company. Investor Jana Partners initially filed a 13D on its investment in physician staffing giant TeamHealth last year before management was ultimately replaced and the company sold to Blackstone Group.

CHS declined to comment but noted that Chen said in the 13D disclosure that Shanda has a good relationship with CHS management and intends “to engage with” leadership and the status of the company’s ongoing turnaround strategy.

Franklin, Tenn.-based CHS is in the middle of a turnaround plan that includes the sale of hospitals and other assets to stanch operating losses and reduce its outsized $15 billion of debt.

CHS is negotiating to sell 25 of its 158 hospitals and other assets with the hope of raising about $1.8 billion in net proceeds from those efforts. The money will be used to pay down debt.

The timing of Chen’s new activist disclosure comes about three weeks before the April 1 expiration of a poison pill defense. The pill, or shareholder rights plan, would make it more expensive for a hostile suitor to buy the company without cooperation of management and the CHS board.

CHS CEO Wayne Smith told Modern Healthcare in January that the shareholder rights plan would be allowed to lapse on April 1. It was put in place so CHS could undertake its turnaround while reviewing strategic options for the company, including its possible sale.

A sell-off of CHS shares in the last hour of trading Monday caused the price to fall from $9.59 at 3:15 p.m. ET to close the day at $9.39. That was down 2 cents from the opening.

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