Developing World Healthcare Blog
May I Have a Seat?
We recently took note of media reports that the Singapore-based Shanda Group, 13.7% owner of US-based hospital operator Community Health Systems, had changed its filing status to 13D from 13G. According to the filing, Shanda intends "to engage with [Community’s] management team regarding [its] business and operations and the status of the [its] ongoing turnaround strategy." Shanda Group is the global private investment vehicle for billionaire Chen Tianqiao and his wife Chrissy Luo who built China’s online gaming and online literature industries. Shanda also has significant holdings in Legg Mason (10%) and Lending Club (15%).
The news caught our attention because of the emerging market link. We know (or knew) Community’s business quite well from our prior work investing in and publishing research on the industry. The company is one of the largest for-profit hospital chains in the U.S. and grew successfully for many years through organic growth and acquisitions. Unfortunately, the highly-leveraged acquisition of struggling Health Management Associates in 2014 has proven very challenging and the company is restructuring through asset sales and other actions.
The change in filing status looks like a precursor to Shanda becoming more active with its investment, most likely seeking board seats. In January, Legg Mason appointed Mr. Chen as Vice Chairman of its Board of Directors. Shanda’s President Robert Chiu joined the board at that time too. The press release stated that Mr. Chen will focus on helping Legg Mason develop its technology innovation strategy, as well as business development and brand building in Asia, particularly in China. Also, Legg Mason will continue to work closely with Shanda Group to leverage its expertise in technology and to access retail and institutional markets in Asia.
Shanda is a passive investor in Lending Club, which brings back us to Community.
We can only speculate as to Shanda’s vision and intentions, which could range from simply supporting or hastening the company’s turnaround to something more ambitious. Mr. Chen clearly has the ability to “think out of the box” as shown in this interview with the Financial Times on the subject of securitizing fine art:
If we consider Shanda’s global outlook, the range of options broadens beyond supporting a turnaround to exporting Community’s expertise or actual business to China (which is badly in need of reform) or elsewhere. China’s hospital system has suffered from distorted incentives and inefficiencies for decades. Reimbursement for medical services is below cost, so hospitals have relied on drug sales for 50% or more of their revenue. The average length-of-stay averages 10 days (twice that of the US) and varies by province (based on wealth). Patients flock to the major cities for care because of the limited resources available in small cities and rural areas.
If you have time, try a news search with the term “hongbao doctor” and you’ll learn more than you care to imagine.
Mr. Chen is well connected with the government by virtue of his appointment to several government boards, including the National Committee of the Chinese People’s Political Consultative Conference (CPPCC). The combination of Shanda’s connections and resources with Community’s expertise makes for some interesting possibilities. We assume that Mr. Chen’s team understands the differences between the US market’s for-profit hospital model and Asia’s private hospital model (think “Emergency Medical Treatment and Labor Act”).
We don’t know if these possibilities would lead to a profitable business for Community, but their discussion would make for some good reading.