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Stock Analyst Update

HCA Deal One of Largest in Its Recent History

The near $1.5 billion purchase of North Carolina's Mission Health gives the narrow-moat firm an immediately dominant presence in the area.

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After its initial letter of intent was disclosed in March,  HCA Healthcare (HCA) announced a definitive agreement to acquire North Carolina's Mission Health system on Aug. 31. With a price tag of nearly $1.5 billion, the transaction marks one of the largest single deals in HCA's recent history. HCA gains seven facilities with nearly 1,000 combined beds, while establishing a new foothold in North Carolina. Given Mission Health's non-profit status, the transaction is particularly unique and will be subject to approval by the state's attorney general's office. Additionally, the $1.5 billion payment will be contributed to the newly formed Dogwood Health Trust, a non-profit organization that will be dedicated as a resource to improve the health of communities in western North Carolina.

On the surface, the acquisition appears to run counter to our prevailing thesis underpinning HCA's narrow moat--Mission is a rural provider, in a state new to HCA, with a patient mix that skews heavily toward Medicare, Medicaid, and uninsured populations. That said, we think the uniqueness of Mission's competitive position makes it a prime candidate to see improved operational efficiency under HCA's ownership. Mission boasts roughly 50% market share of the counties in which it operates and is the largest single employer in the area. Until 2016, it was governed under a certificate of public advantage granted to it in the 1990s that sanctioned its combination with St. Joseph's Hospital in 1998, its neighboring competitor in Asheville, North Carolina. The agreement required Mission to operate under margin, cost per case, and employment caps that limited its ability to benefit from its market power. Now free from these restrictions, its acquisition gives HCA an immediately dominant presence in the area. We expect the Mission system to benefit from HCA's cost advantages in procurement, while also seeing stepped up investment from a for-profit parent organization with much deeper pockets.

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Jake Strole does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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