Legendary short seller Jim Chanos of Kynikos Associates founder discusses why he’s shorting Envision Healthcare and what else he’s watching for at the Delivering Alpha conference.
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Legendary Short Seller Jim Chanos Says Short Envision Healthcare
Transcript
And vision to me why. I mean we knew you were short this name I think you had revealed it before but why. Sort of reiterating it today why are you still short this name. Hey have a deal with KKR right. Not right. And we think the risk reward is very interesting because we think it's not negligible chance that the buyer may take another look and figure out what they've done. Well you think the deal may not happen. I think the deal may not happen. No. Most likely it will. Thus the spread. But Steve and I were just talking off camera the risk reward is kind of interesting given what we see as the realization. So in my presentation I talked about PPM 1.0. Sadly I'm old enough in this business to see these things come and go in the mid to late 90s as a company called Fai Corp.. They went broke. Yeah. It led to eight or nine other Mede two companies that went public in the PPM business which is physician practice management. This is the business of buying doctor practices. Signing the doctors up for basically three to five years to reduce salary and then capitalizing that and then rinse repeat. The problem of course is that the end of three to five years. The doctors want to get paid more. And you either have to pay them more thus hurting your margins or you have to read up a contract and capitalize that in effect what these companies do is they capitalize salaries up front. It's just that simple.
If you look at the business model in the late 90s when the contracts rolled off because every doctor and his brother and sister wanted to sell out to these guys for obvious reasons the public markets got wind of it and shut off capital. Right. Since they were on negative cash flow businesses and eight of the nine public companies went bankrupt. Wait if you sat down Weiss said to you I don't get this short. You want to expand on sure where that comes from and have Jim. It's got to hold little mini debate on this right now. Much more to the company than I do right. So I went through the proxy. We were involved with Team health because we thought that that Blackstone bought it for much less than it's worth it went out 43 50 actually Invision had an offer eight months before Blackstone bought it at 70 dollars on a stock for stock basis. So it declined. I wasn't in love with the business. I thought that that Blackstone got very cheap. I've kept pace with it services conference calls for bondholders and is going OK but after I say no where where the bonds get I know where to buy it. It's got seven turns and leverage ridiculous funds earned 85. Yeah OK. So but I'm not. I was in love with it. But but you think Blackstone would do that deal again. No but they've taken a public Ridgely but an event in this short that actually occurred to me if I said I don't get the short but I get the short. And here's why I know my downside is my downside is deal price.
It's 45 bucks. If the deal breaks it will cost Blackstreet a couple hundred million bucks to walk away. They may say they are KKR as are the other thing about these companies which I don't like is if you go to an emergency room. Chances are it's outsourced completely to either team how or to envision and guess what anybody walks through emergency room. You've got to treat them. Guess what. Bad debt expense 14 percent. Any company that runs a bad debt expense like that is in trouble. So I don't hate you I hate you hate a roll of in any sector. Like you know not necessarily Josh what I want to see is the business itself. Right. And there are roll ups that basically give scale in businesses where you can actually cut the overhead right and just add the operating profits to the business. There are others where the roll ups are done for accounting reasons and PPM industry. They're done for accounting reasons they're done specifically so that you can you can actually capitalize the upfront salaries and then make the business look more profitable because I use that analogy in the other room of Josh and Steve's burger chain. Okay you have one burger wasteful. Okay. And so say it's not profitable with just a single shack and the two of you pull 50 grand out of your your work in six days a week 16 hours a day. I come in and say you know what I'm going to play a little private equity magic with you. I'm going to buy your burger stand for 100 grand.
I'm going to sign you guys you've got to run it for me for five years. And in exchange for cutting your salary to 50000 from 100 combined I'm going to pay five hundred thousand dollars for that contract. So I'm going to pay you six hundred thousand dollars. You're going to take a 50000 dollar cut over five years. You're going to say Wow that's fantastic. Sold to you. I'll be your employee for five years. Right. I'm going to tell my investors since I'm going to capitalize everything. The business is now cash you get 100000 dollars and I just paid six times for that. Can't you come in and give us a lower weighted average cost of capital. Give us maybe a marketing budget. Combine us with another burger chain and make it two though because you literally can't do it's a body shop. It's fact. So you know that and so that and sort of just let me finish the thing. Yeah. So what what I've done now is I've told my investors I've bought this business for six times cash flow. It's nonsense because the minute your contract is up I'm paying you guys. And the business is not profitable again. And this is the problem with the PM's in order to to stop that erosion of contracts rolling off they have to buy up more doctor practices. And if you look at the numbers my presentation today is exactly what's happening.
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