Morningstar | The terms of Apollo's announced acquisition of LifePoint appear fair to the company's shareholders.
LifePoint stands out to us as likely the best house on a bad block, having operated fairly effectively despite persistent demographic, reimbursement, and economic headwinds. Under our framework, LifePoint’s rural focus limits it from displaying the qualities we’d generally associate with moaty businesses in the industry – a rarity for even the best-positioned firms in the space. We think LifePoint has pursued an effective strategy to make the best of its core competencies, folding underperforming facilities into its system and improving operations through targeted investment and cost efficiencies. While this path has been bumpy lately, we anticipate that the recent underperformance of acquired facilities will abate over time, and we forecast an improving return on capital profile for the business. That said, we think the firm will be hard-pressed to generate sustained economic profit over a cycle, as a high share of government and uninsured volume along with underutilized capacity weigh on both margins and capital turns.We expect management to continue to deploy excess capital into share repurchases and incremental acquisitions over time – likely the highest-return, highest-probability bets for the company. On the other hand, management risks moving too far afield with this strategy, potentially encroaching on more urban markets where the firm has less institutional expertise. Additional competition for patients and labor are the defining characteristics of more urban geographies, and we believe material local scale is required to effectively contract pricing, serve patients, and leverage costs. While we think this is a fine line that management has walked reasonably well historically, it’s something to monitor as the firm continues to grow. Additionally, given the firm’s payer mix exposures, we see abrupt changes to Medicaid as the most significant risk for the firm over the long term, particularly as it becomes a heavier burden on states’ budgets.LifePoint Health owns and operates community hospitals, regional health systems, physician practices, outpatient centers, and post-acute facilities. At Dec 31 2017, the company operated 71 hospital campuses in 22 states throughout the U.S., having a total of 9,254 licensed beds. The company's hospitals provide medical and surgical services commonly available in hospitals in non-urban markets. These services include general surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, pediatric services, and, in some of the company's hospitals, specialized services such as open-heart surgery, nursing, psychiatric care and neuro-surgery. In several markets, the company also provides outpatient services.
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