Special Situation Investing

Monday, August 14, 2006

HealthSouth (HLSH.OB) Potential Spinoff

HealthSouth has announced plans to divest it's surgery and outpatient rehab centers. The outpatient division is quite small in comparison to the parent, from the article:

In the three-month period ended June 30, HealthSouth said that among its four primary operating divisions, surgery accounted for 24.5% of revenue and 18.1% of operating earnings; its outpatient division contributed 11% of revenue and 6.8 % of operating earnings

Another article provides comments on the form that the divestiture might take:

Chief executive Jay Grinney said HealthSouth is considered alternatives including a spinoff or sale of its underperforming divisions.

The company has clearly stated that they will use the proceeds to pay off debt. In the case of a spinoff this would likely mean the spun-off division would take on a large debt load and pay it back to the company in the form of a tax-free dividend. High-debt can exacerbate institutional selling in the case of a spinoff. On the flip-side, HealthSouth is relatively small at $1.8 Billion and is not part of the S&P 500 which will limit the amount of selling when and if a spinoff occurs. In spite of this, the story is worth watching.


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