Community Health Systems Faces Heat From Investor

Community Health Systems Inc. came under fire from an investor crying foul over a recent spinoff by the embattled hospital chain.

Q Investments LP sent a letter on Wednesday to Quorum Health Corp., a chain of 38 rural hospitals that Community Health spun off in April. In the letter, which was reviewed by The Wall Street Journal, Q Investments asks Quorum to investigate whether Community Health concealed costs as it prepared the spinoff to enable it to extract more cash from the deal. Q Investments said it wants Quorum to "take appropriate legal action."

"We categorically reject the allegations by Q Investments that Community Health Systems committed fraud or any other wrongdoing in connection with the Quorum spin-off," said Tomi Galin, a Community Health spokeswoman. "Community Health Systems conducted itself appropriately and made all necessary disclosures throughout the process."

Quorum didn't respond to requests for comment.

At the time of the spinoff, which enabled Community Health to focus on larger markets, Quorum borrowed $1.2 billion and used the proceeds to pay a dividend to its former parent. Four months later, Quorum slashed its earnings guidance, citing unexpectedly high costs and disappointing sales volume. The stock plunged by 50% that day.

Community Health is already facing a deterioration in its business that has helped put a spotlight on the company's debt level. Community Health is selling assets to help pay down a $15 billion debt load and said last month it would explore strategic alternatives.

Its shares have tumbled from a high of $52.71 in June 2015 to $10.46 Wednesday, giving it a market value of just $1.1 billion.

"We believe Community Health was desperate to raise cash, and they saw an easy path to do so by stuffing new investors in Quorum with inflated guidance and concealing costs within what they knew was a disintegrating business," the letter reads.

In August, Quorum cut its forecast for 2016 earnings before interest, taxes, depreciation and amortization to between $175 million and $200 million, from the $265 million to $275 million range it set before the spinoff. The company attributed the drop to higher-than-expected costs and wider losses in some hospitals it said it would divest itself of.

It cited in particular $18 million in fees stemming from renegotiated contracts and $12 million in labor costs.

Q Investments said it believes Community Health likely knew or should have known about those costs at the time of the spinoff and failed to properly disclose them.

Q Investments, a Texas hedge fund that isn't typically activist, owns 1.3 million shares of Quorum stock, worth about $8 million Wednesday. That makes it a top-10 investor in the company, which has a market value of just under $200 million. Q Investments also owns $50 million of Quorum bonds.

Write to David Benoit at david.benoit@wsj.com and Melanie Evans at Melanie.Evans@wsj.com

(END) Dow Jones Newswires

October 12, 2016 23:15 ET (03:15 GMT)

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