GREENWICH, Conn.--(BUSINESS WIRE)--The following is a letter that ASL Strategic Value Fund sent to the Board of Directors of Community Health Systems, Inc. (NYSE:CYH):
August 8th, 2017
Board of Directors
Community Health Systems, Inc.
4000 Meridian Blvd.
Franklin, TN 37067
Attn: John A. Fry
Dear Mr. Fry:
ASL Strategic Value Fund has been a long-term investor in Community Health Systems (CYH: NYSE). We have attempted on several occasions to contact management to voice our concerns about recent operating results. Unfortunately, none of our phone calls were returned. We now feel obligated to reach out directly to the Board of Directors due to this non-response.
Over the course of 2016 management failed continuously to meet its own operating guidance for either top line revenue growth, same store comps or EBITDA. These guidance misses partly caused by the ill-conceived and poorly executed HMA acquisition has resulted in the destruction of billions of dollars of shareholder values. Last week, the company once again missed its own guidance resulting in the further decline of the stock price.
Community Health Systems became a public corporation in 2000 and came public at a market price of $13 per share. As of the recent closing price of $6.50 per share, the shareholders have seen a loss of approximately 50% of their capital over the past seventeen years. Over this time period, the company CEO Wayne Smith has received total compensation of over $350 million. The five senior most executives have received total compensation of over $500 million, this amount is nearly the current market capitalization of the company.
It is time for the Board to exercise its fiduciary duty to the shareholders and replace the current CEO. It should also act immediately to claw back significant portions of this past compensation from existing and retired executives.
Another very troubling development is the fact that although the company signed a settlement agreement to improve its corporate governance in November 2016, the Board has failed to enact any of these required actions. Under this settlement agreement approved by the Court, the company was required to immediately add two independent directors to the company’s Board of Directors with one being named Lead Director. It is now eight months since this settlement agreement was signed with no compliance. The Board’s inaction stands in stark contrast with recent developments at Tesla, Inc. Tesla received a letter from a number of its shareholders demanding an improvement in their corporate governance. Within two months Tesla added two new independent directors to its Board of Directors. One can only conclude that Community Health’s Board negotiated their settlement agreement in bad faith. One might also conclude that these independent directors have not been added to the Board because truly independent directors would not allow such destruction of shareholder value to go without recourse.
Additionally, there is a major disconnect between where the company’s assets are being valued in the equity market and the value that competitors are currently willing to pay for these assets. Although the company trades at approximately 7 times EBITDA, the company has been able to monetize 30 under-performing hospitals for over 12 times EBITDA. The time has come to monetize the balance of the company’s portfolio of hospitals. Each multiple point increase in EBITDA (above 7 times) is worth an additional $16.50 per share.
It is time for the Board to take immediate action. Management’s previous missteps have resulted in billions of dollars of shareholder losses, all the while reaping tens of millions of dollars in compensation. The Board has a fiduciary obligation to hold management accountable and to maximize the value for the shareholders of this company.
ASL Strategic Value Fund