SunLink Health Systems: A Cheap Monopoly with an Attractive Buyout Offer

Those of you seeking an illiquid stock for your portfolios with a wide bid/ask spread would be well served taking a peek at SunLink Health Systems (SSY). Tuesday's volume was an unusually high 6,400 shares (3 month average: 1,870) and the bid/ask is $5.75/$5.94 with the last trade at $5.76. SSY operates 7 rural hospitals in the southeast, each of which is the only hospital in its community. Six of the hospitals are owned by SunLink, and 1 is leased. Yahoo Finance shows SSY's EV/EBITDA multiple at 5.6, compared to 6.8 for LPTN, 15.0 for CYH, 9.6 for THC, and 7.7 for HMA. Perhaps the most interesting part of the story is that SSY has a buyout offer on the table for $7.50 cash with no financing contingency. That's a 30% premium to the last trade. Management previously announced that it will be reviewing strategic alternatives and hired Stephens & Co to assist with the process. What's not to like about a cheap monopoly with an attractive buyout offer? The company has turned down buyout offers in the past and is giving the current bidder (Resurgence Health Group and Berggruen Holdings) the cold shoulder, inspiring this nasty ultimatum letter (which is a must-read if you are interested in the stock). Also note a flimsy balance sheet and capex spending that regularly outpaces cashflow. In the past, a growth by acquisition strategy was favored by management, but it's not clear to me how new facilities will be paid for. SunLink's hospitals have also been challenged by having to serve patients who can't pay and government programs that won't. I can't explain SunLink's lack of response to Resurgence's repeated bid for the company, but if there is a buyout at $7.50 (perhaps forced by proxy), you'll make a tidy profit. What happens to the stock if there's no buyout and whether you mind being stuck with the shares is up to you to decide.

Comments

[Random Walk:]

Excellent points raised. A long-term play here is also an implicit bet on increasing the number of insured. In addition, it is hard to imagine, though still possible, for policymakers to ignore the adverse consequences of the balanced budget act of 1997 on hospitals.

2008 Mar 27 02:48 PM