Community Health Systems Spinoff Quorum Health Emerges From Chapter 11

Business is tough right now, including for some recent spinoffs. While California Resources Corporation was missing interest payments at the end of June, 2016 rural hospital spinoff Quorum Health was just emerging from Chapter 11.

The company had been shrinking even prior to coronavirus and it was even forced to shutter and sell off numerous hospitals. From the getgo there were concerns about the properties being the least favored and, oh yeah, Quorum inherited a monstrous debt load at the time of its spinoff from Community Health Systems (CYH). That created liquidity issues even before coronavirus slammed its business by cancelling elective surgeries and most doctor visits.

Private equity firm KKR (KKR) was one of Quorum’s major debt holders and also a minority shareholder when it floated the idea of taking Quorum private at $1 per share late last year. The deal never materialized though and in March, KKR announced that talks had shifted towards a reorganization plan instead. Shares then collapsed and in April the company entered Chapter 11 after agreeing to a restructuring agreement with its lenders and noteholders.

The company emerged from Chapter 11 earlier this month, but the process wasn’t without a hefty dose of drama. The company faced a host of challenges from its largest shareholder, distressed fund Mudrick Capital, but ultimately prevailed. Mudrick was upset because the proposed restructuring wiped out shareholders, but the judge approved the plan and the company emerged from Chapter 11 earlier this month with a lot less debt (~$500M). The company is now controlled by its former creditors which also include Goldentree Asset Management and Davidson Kempner.

This is just another example that not all spinoffs are winners, particularly amongst the recent crop. Quorum’s spin has been messy from the start. Shortly after the spin, hedge fund R2 Capital alleged fraud, but Quorum’s board declined to pursue legal action against Community Health. The parent company even sought to terminate the very typical transition services agreement with the spinco several years early. Just this week, Community Health and Quorum settled a shareholder lawsuit for $18M tied to the spinoff. Shareholders alleged that the company inflated the price of Quorum at the time of the spinoff because it failed to disclose impairments to certain goodwill and long term assets. Apparently ‘if those who purchased all affected Quorum shares participate in the settlement, the average recovery per share would be 60 cents before deduction of any fees or other expenses.’ Maybe some shareholders will end up with a little something at the end, but this spinoff has just been a mess.

Disclosure: Author is long shares of KKR.


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