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HealthSouth announces plan for restructuring
Monday, August 14, 2006
MICHAEL TOMBERLIN
News staff writer

HealthSouth Corp. will jettison three of its four operating divisions to become exclusively an inpatient rehabilitation company with greater growth prospects.

The new company will retain the HealthSouth name and plans to be publicly traded on the New York Stock Exchange by the end of October, with the ticker symbol "HLS." A one-for-five reverse stock split should also be completed prior to re-listing, the company will announce today.

Investors will exchange five shares of HealthSouth stock to receive one share of higher value. The company plans to hold a shareholders meeting in Birmingham soon to approve the reverse split.

The company previously has said it is exploring the sale or spinoff of its diagnostic division with Deutsche Bank.

Now the outpatient rehabilitation and surgery center divisions are also on the block, with Goldman, Sachs & Co. handling the sale or possible spinoff of those divisions.

The moves are designed to reposition HealthSouth for profitability while cutting into its debt, Jay Grinney, chief executive at HealthSouth, said in an interview with The Birmingham News.

"The growth prospects in the post-acute arena were significant, but because of our debt load we were unable to pursue those as well as pursue development opportunities in our other sectors," Grinney said.

HealthSouth's decision to retain inpatient rehabilitation was an easy one, Grinney said, given its dominance in that segment. In the second quarter of this year, the inpatient business accounted for 57.9 percent of its revenues and 86 percent of its earnings.

Inpatient has 202 facilities with 23,700 employees, 68 percent of all HealthSouth clinical employees. The majority of the 800 corporation jobs also would stay with the new HealthSouth.

"It's our largest division. It's also responsible for generating a substantial portion of our cash flow," he said. "It has tremendous growth opportunities associated with it. We've been very pleasantly surprised at how many of those opportunities are out there."

The surgery center business is the second largest division, based on the most recent quarterly earnings report, with 24.5 percent of revenues and 18.1 percent of earnings. There are 153 surgery centers with 6,400 employees.

The outpatient rehabilitation business makes up 11 percent of revenues and 6.8 percent of earnings with 606 facilities and 3,500 employees.

The diagnostic division contributed 6.6 percent of revenues and a 10.9 percent loss in the second quarter. There are 76 of those facilities with 1,260 employees.

The corporate headquarters has five facilities with 800 employees, a portion of which deal exclusively with the various divisions.

Grinney said he is not sure why the various divisions existed under HealthSouth because they have little in common and lack synergy. Each has different patients, referral sources, payors, such as Medicare and insurance companies, and information systems, making it difficult to consolidate operations.

HealthSouth will report today it had an operating loss of $28.9 million in the second quarter of this year, a $17 million improvement over the loss it reported the same period a year ago. A 3.8 percent drop in revenues was attributed largely to the impact of the much-talked-about 75 percent rule that reduces Medicare payments to inpatient rehabilitation facilities based on a set formula. Other factors included the closing of facilities and the reclassification of some surgery centers, the company said.

Most of the proceeds from the sale of the three divisions would be used to trim HealthSouth's $3.4 billion debt load, which currently equals more than six times the company's pretax earnings. A more common ratio in the health care industry is three- to four-times earnings, a threshold HealthSouth aims to be below in five years, according to John Workman, HealthSouth's chief financial officer.

Four companies?

The shedding of the divisions could come in the form of a sale to an existing company or could be a spinoff with independent financial backing or possibly through a separate public stock offering. Grinney said it is possible Birmingham could end up with four separate health care company where it currently has one.

"It gives us the opportunity to deleverage, but it also gives the Birmingham business community the opportunity to foster and encourage and see growth in potentially three new businesses," he said. "Each one of those, then, has the potential for growing, expanding and investing in their respective areas. That could be a very good move for Birmingham."

Grinney said the companies are ready to stand up on their own with relative ease.

"The one thing that we're very pleased with is the fact that we have assembled very strong, top-notch senior management talent in each of these divisions. Each of them is capable to taking their respective divisions and leading them in a spinoff type of environment," he added. "Because of the complexity of our ambulatory surgery division, the fact that it is a much larger division, Mike Snow, our chief operating officer, would take that division out along with Joe Clark and the senior management team that they've put together."

Workman envisions as much potential for an investor purchase of the divisions as he does for a competitor coming in and buying an entire operation.

"I think all of these have a fairly high likelihood of being separate stand-alone businesses. There is a lot of private equity money out there today, and we think there will be a lot of interest there in addition to the split-off or spinoff scenarios," Workman said. "We think it's more likely to be a financial buyer in surgery centers. In outpatient it's got chances either way. In diagnostic it will more likely be a financial buyer as well."

All four companies could possibly be on the current HealthSouth campus with the reconfiguration of the offices there.

Grinney said the spinoff or sale of the division may take more than a year to complete.

"If we can move faster, we will," he said. "We don't want to drag this out any longer than we have to."

Back on Big Board

The decision to go back on the New York Stock Exchange came after discussions with NASDAQ and NYSE.

"Both exchanges expressed a strong interest in having us listed on their exchange," Grinney said. "In the final analysis, the board believed it was important to go back to the New York Stock Exchange. It really will signal a final step in the rehabilitation of the company."

The company was listed on the Big Board from the time it went public in 1986 until it was dropped from the exchange in the wake of a $2.6 billion financial fraud that came to light in March 2003.

However, then it was listed under the "HRC" symbol. That needed to be changed, Grinney said.

"It was clearly important to have a different symbol because we are such a different company," he said.

The reverse stock split is meant to reduce the 398.24 million shares of HealthSouth that are now traded to approximately 80 million, which is more consistent with a health care company of HealthSouth's size, Workman said.

Whereas one share today trades at $4.10 based on Friday's closing price, after the reverse split, five shares will be converted into one with a value of $20.50.

The move also aims to lift the share price out of single-digit trading, where it had been even before the fraud was disclosed. It should attract institutional investors and other would-be traders who currently do not pursue companies with share prices as low as HealthSouth's.

The reverse split should also reduce transaction costs for investors due to fewer shares being traded. Announcements related to per-share earnings would also be more impressive when spread out among fewer shares.

Keeping its name

Though the financial fraud has taken a toll on the company's earnings as it struggled to clean up its finances and pay legal settlements, it apparently has not done significant damage to the HealthSouth name among the general public. The company's research into whether it should change the name has revealed there is no need to go through such a costly undertaking.

"The name HealthSouth is synonymous with high quality health care and particularly high quality rehabilitative care," Grinney said. "The name really wasn't tarnished in the local communities. In Birmingham it was."

The costs associated with a name change, even to do basic tasks like change signs and letterheads, would have been enormous.

"It would have been at least a $20 million investment at a time when we don't exactly have $20 million lying around," Grinney said. "There was such brand equity, particularly in rehabilitative care, that it made sense to keep that part of the legacy."

As has become common for the company during a major announcement, Grinney reiterated HealthSouth will remain based in Birmingham.

"We do that primarily for the rabble-rousers and the convicted felons out there trying to mislead the public about our intentions," Grinney said. "Clearly we have absolutely no desire to move."