In 2016, not long after Chinese billionaire Tianqiao Chen’s Shanda Group bought almost 16 million shares in Community Health Systems Inc., making it the hospital giant’s largest shareholder, executives from both camps had a get-to-know-you conference call.
One of the first questions from CHS CEO Wayne Smith: What did Shanda Group know about hospitals?
“I told him that we didn’t know much,” Shanda Group President Robert Chiu told the Nashville Business Journal in a recent phone interview from Hong Kong. “He was so kind; he was like my college professor.
He started to walk us through the major characteristics of running a hospital … in a very, very straightforward, honest way. So, we just fell in love with this guy.”
That love hasn’t wavered, even as Shanda’s investment, now worth approximately $134.6 million, has lost about half of its value since that call. And despite leading a company on the ropes, Smith has been able to pull off a feat other public company CEOs — not to mention other CHS executives — have been unable to do in such a situation: keep his job.
Smith, who declined through a spokeswoman to be interviewed for this story, is navigating the biggest challenge of his 21-year career at CHS. The $7.6 billion merger with Florida-based Health Management Associates that Smith orchestrated in 2014 to launch CHS to the top of the industry has left the company struggling to pay off debt. It’s sold more than 40 underperforming hospitals and closed three others. The company’s stock, trading at almost $53 per share three years ago, dropped to less than $3 this summer — the lowest since the company’s initial public offering in 2000.
Other area health care giants, such as Brookdale Senior Living Inc., have parted ways with their CEOs after months of struggles and calls from activist investors for change. But Smith has not heard similar criticism from his board or investors, even receiving a vote of confidence from Shanda when the firm increased the size of its investment to more than 27 million shares in January, representing almost 24 percent of the company’s outstanding shares. And while activist investors are often attracted to struggling companies with depressed share prices for the chance at a quick return, CHS has drawn no such attention.
For his part, Smith has implemented an aggressive plan to right his ship. CHS restructured a portion of its debt this year, buying the company as much as six years with creditors. Since 2016, the company has spun off, sold or closed nearly 90 hospitals to pay off debt and strengthen CHS’ portfolio. The company increased its third-quarter revenue by 3.2 percent compared to a year ago and grew third-quarter cash flow by more than $200 million compared to last year — a 203 percent increase.
Despite Smith’s efforts, several area health care executives and former CHS employees said they expect any turnaround of the company to be slow. While CHS is spending its money financing debt, competitors like HCA Healthcare Inc. are injecting millions of dollars into their facilities. In an industry that requires constant improvement and innovation, CHS is falling behind, one Nashville health care executive said.
That’s usually not something an investor wants to hear, but Shanda is committed to making sure Smith is the person that executes the turnaround — even if that takes time.
“We would be lying to ourselves if we feel this was something that could be fixed very shortly,” Chiu said. “At the end of the day you are investing into people, into leaders. … We always have to think about who is the best leader under the current situation. So far we have concluded that Wayne appears to be the most appropriate, the best leader for this company, especially under the current situation.”
A bet gone bad
Smith took the helm of CHS’ 38-hospital operation in 1997, after two decades at Louisville-based health insurance giant Humana Inc. Over the next three years he acquired seven hospitals and took CHS public on the New York Stock Exchange at $13 a share. In 2007, he helped almost double the size of CHS by buying Triad Hospitals Inc., adding more than 50 hospitals to the company’s network.
Led by Smith, Chief Operating Officer David Miller and Chief Financial Officer Larry Cash, CHS became known for operating well-run hospitals in often overlooked rural markets.
“Over the years they built a reputation of being the company of choice if you’ve got a rural hospital you want to sell,” RBG analyst Frank Morgan said. “They did a really good job of growing the company.”
So in 2014, when the opportunity came to add Health Management Associates’ 71 hospitals to CHS’ existing 135-hospital portfolio, the company’s executive team was confident.
But what was supposed to be CHS’ ascension to the top of the health care world quickly turned south. CHS struggled to integrate the new hospitals. The facilities needed more structural improvements than first thought. HMA turned out to be a “troubled company,” as Cash said during a presentation to analysts and investors in 2016. In September, CHS agreed to pay $262 million to settle a Department of Justice investigation of HMA that predated the merger.
“The assets they acquired were having more problems than probably were appreciated at the time of the deal,” Morgan said. “And the macro backdrop for hospitals, rural markets in particular, were deteriorating. All those things together got you where they are today.”
In June 2015, shares of CHS were trading at $52.93. Eight months later, they had collapsed to $12.03.
When shareholders lose 75 percent of their investment, executives are typically forced out or begin jumping ship — as was the case at CHS. Miller retired in April 2016, just months after the crash. He was followed by Executive Vice President, Secretary and General Counsel Rachel Seifert in January 2017. Cash left his role one month later.
In April, several sources inside the company confirmed that at least 70 employees, and potentially more, had been laid off. But Smith, still the company’s 12th-largest shareholder, has stayed with the ship.
His ability to weather this storm runs counter to what CEOs of public companies often experience. CHS has not had to fight off activist investors calling for Smith’s ouster or pushing short-term solutions to inflate the company’s stock price the way Brentwood-based Brookdale has over the past two years. Some local health care executives have speculated to the NBJ that CHS is too much of a long-term play to attract an activist investor, while others have said the company has sold too many valuable assets, which, coupled with $17 billion of debt, has rendered the company too challenging of a turnaround project.
As for Smith, one Nashville health care executive attributed the longtime CEO’s survival to his strong relationship with his board and investors, as well as a desire to lead the turnaround of a company he helped build. A former CHS employee said Smith has garnered loyalty over the years from employees and board members alike, partially because of his charm.
Chiu said that was something he picked up on in their first phone call.
“I could already feel the charisma of this person. I could already feel some of the strong leadership person. And he talks with authority, and when he talks you will want to listen,” Chiu said.
Guarded by angels
Chen started Shanda Group as an online games company in 1999, building more than 200,000 internet cafes across China. Shanda became the first Chinese online games company listed in the U.S. in May 2004 with a $200 million initial public offering, the largest for a Chinese company at the time. The company beat that mark five years later, when it spun out Shanda Games with a $1 billion IPO before going private in 2012.
Two years later, Chen sold the Shanda Games portion of Shanda Group and turned the company into a global private investment firm. Most of Shanda’s investments are in the technology and finance industries, in companies like General Electric, KKR, Alphabet Inc. (better known as Google’s holding company) and IBM.
When Shanda became CHS’ largest shareholder in the third quarter of 2016, its first big splash into health care services, shares of CHS were trading between $10 and $13. Chiu said Shanda typically takes more time to get to know a company’s management team before making a large investment, but his firm wanted to invest quickly while they had an opportunity — plus industry experts told them Smith was an excellent hospital operator.
After meeting in person, Chiu said Shanda was impressed with Smith and his leadership team. Plus, having been entrepreneurs themselves, Shanda officials were sympathetic to the company’s struggles, which Chiu said had been overly penalized by the market. He said executives need room to focus on rebuilding the company without distractions from outside forces.
“Chairman Chen has asked us to almost play a guardian angel role — allow me to exaggerate a little bit — meaning that since we have such a big position, in a way the management team is protected,” Chiu said. “Some activist funds might want to do this or that, but you haven’t seen much, if at all, of that with [CHS]. And I think that has something to do with that they have a very big anchor investor that are very supportive, not only sympathetic but … very appreciative of all the effort they have put in to try and build a better company.”
Shanda has forgone some of the typical perks that come with being a company’s largest investor. For instance, they don’t have representatives on CHS’ board. Chiu said Shanda only offers advice when asked. He said his firm has not given input into CHS’ turnaround strategy, instead leaving it to Smith.
He said Shanda’s management talks to CHS executives a couple of times a quarter or after unexpected events, like hurricanes or market changes.
“Sometimes the share prices drop for no reason. We usually would just reach out to pat him on the shoulder to encourage him, or sometimes my chairman will send him a letter basically playing the football coach in the locker room … to make sure they continue to be in upbeat spirits,” Chiu said. “It is a tough job that they are undertaking, so I think they can use encouragement from their largest shareholder.”
As for when Chiu expects the turnaround to be completed, he hopes CHS will be back to its previous standing in the next three to five years. He said the CEO’s plan is working, and he expects Smith will be at CHS to see it through.
“If you call HMA a misstep, if I were Wayne, I would not want my track record, my career to be ruined by the one situation in the second chapter of my career. … So, I believe Wayne has the strongest incentive to want to turn the situation around,” Chiu said. “I’m betting on him to fix the problem before he decides to retire.”