I will now hand the conference over to Dave Styblo, Senior Vice President of Investor Relations. Dave, please go ahead.
Thank you, operator, and Welcome to our conference call to discuss Ardent Health's acquisition of the Boone Health System. Joining me today is Ardent President and Chief Executive Officer, Dave Caspers, and Chief Financial Officer, Alfred Lumsdaine. Dave and Alfred will provide prepared remarks, and then we will open the line to questions. Additionally, we would encourage participants to view an investor presentation we have posted to the Investor Relations section of our company website that can be used in conjunction with today's call. I want to remind everyone that today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission and the risks identified in the press release announcing the Boone Health transaction.
Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non-GAAP financial measures, including Adjusted EBITDA. Reconciliation of these measures to the closest GAAP financial measures is included in the investor presentation for this call and available at ardenthealth.com. With that, I'll turn the call over to Dave.
Good evening, and thank you for joining us. Today marks an exciting milestone for Ardent as we announce a $47 million definitive agreement to acquire Boone Health System, a highly respected and integrated regional health system that has served the mid-Missouri area for more than a century. This transaction is a direct reflection of Ardent's growth strategy. As we have consistently discussed with investors, our approach to shareholder value creation rests on three pillars: operational excellence to strengthen margins, organic growth in our core markets, and strategic capital deployment, including disciplined M&A. Boone advances that third pillar in a significant way and is exactly the type of acquisition we seek. We are acquiring a strong asset in an attractive and growing mid-sized market with significant opportunity to drive operating and financial improvement, all while delivering high patient quality care and safety.
It also represents an effective use of capital at a compelling valuation that we expect will create long-term shareholder value. I will cover each of these investment highlights during the rest of my prepared remarks. Boone is a high-performing organization with a trusted brand, an experienced leadership team, and deep community roots. The health system generates nearly $500 million of revenue and is anchored by its 392-bed full-service tertiary hospital in Columbia, Missouri, that serves as a referral hub for 26 counties in the mid-state. Their integrated system consists of 19 sites of care, including an outpatient campus of five medical office buildings to care for the community. The facilities are modern and well-maintained and include a main bed tower that was built in 2011. Consequently, maintenance capital needs are relatively low, and we can direct investment towards growth initiatives.
Boone is the second-largest provider in the region and holds a strong market share of approximately 30%. Boone has established strong positions in cardiovascular services, orthopedics, women's services, oncology, and other specialties. Its quality credentials are distinctive. The health system has earned recognition for clinical quality, patient experience, and nursing excellence. Its four-star CMS rating is highest in the region, and strong performance in other key categories, including readmission rates and HCAHPS. They lead the peers. The local market profile is attractive. The region offers favorable demographics, strong population growth, and high employment. Specifically, Columbia, Missouri's population is expected to increase 3.4% over the next five years, faster than the national average of 2%. Additionally, the market is well-insured, with 93% of the population enrolled in coverage. Now, let us turn to the strategic rationale for the transaction, which we find extremely compelling.
Boone expands our footprint into a new attractive market. It diversifies our business and enhances scale. Further adding Boone's regional system to our portfolio is consistent with our strategy of building leading healthcare platforms in growing mid-sized communities. We are highly aligned with Boone Health on culture and mission, including putting the patient at the center of everything we do with an aim toward best-in-class clinical care, patient quality, safety, and access to services. That care is delivered by a strong provider team that we hold in high regard. In short, Boone fits exceptionally well with Ardent's operating model. Importantly, we see meaningful opportunities to optimize financial performance. This includes multiple pathways for margin expansion by leveraging Ardent's scale, platform, and our operational excellence.
We have identified at least $30 million of annual synergies that we expect to fully realize in year three and project the year three Adjusted EBITDA contribution will be between $30 million and $40 million. Additionally, we see upside to that synergy target from opportunities to enhance financial performance and access to care through capital investments that strengthen service lines and increase market share. As an example, near-term initial investments consist of expanding emergency department capacity to better meet the existing demand. Lastly, this transaction is a disciplined and effective use of capital. We have established detailed integration plans and quantified savings for specific work streams, each anchored by key milestones and clear accountability. Executing against these initiatives should generate an attractive ROI. Ultimately, we expect the purchase price to be less than two times our expected year three Adjusted EBITDA and accretive to our shareholder value.
Equally important, this combination brings significant benefits for the communities that Boone served by leveraging Ardent's capital, scale, and operating excellence. We are committing $200 million of capital over the next decade, which signals our commitment to accelerate investments in the health system. This will support service line expansion, technology upgrades, and physician recruitment. The investments will help improve patient access, support caregivers, and ensure the community can continue receiving advanced care close to home. Additionally, Boone benefits from Ardent's system-wide clinical and quality programs, technology and IT infrastructures, and operational excellence that help strengthen care delivery. At the same time, Boone's local identity and patient-centered culture are fully maintained. Our philosophy is simple. When we partner with community health systems, we build on their existing strengths while bringing the tools, resources, and operating expertise needed to support sustainable growth and long-term performance.
We are committed to advancing Boone's mission, supporting local leadership, continuing the charity care programs, and establishing a local advisory board to maintain the very strong community involvement. We believe this partnership positions both Boone and Ardent for long-term success. Before I turn the call over to Alfred to discuss the transaction terms and financial benefits, I want to step back and highlight the Boone acquisition comes on the heels of our September announcement to divest our Kansas hospital. Together, these strategic decisions reflect our commitment to sharpen focus, to improve margins, and to optimize capital allocation. Whether we're pruning with intention, as in the case of Kansas, or deploying capital through disciplined M&A, as with Boone, the objective is the same: maximize shareholder value as we curate the portfolio. With that, I'll turn it over to Alfred.
Thank you, Dave. Good evening, everyone. I share Dave's excitement for bringing together the strengths and capabilities of both organizations to build on Boone's strong foundation. Collectively, we can further enhance care delivery as well as optimize operating and financial performance. From a financial perspective, this transaction reflects the disciplined capital allocation framework we consistently communicate to investors. We evaluate opportunities through a straightforward lens: strategic fit, financial return, execution risk, and long-term shareholder value creation. Boone scores exceptionally well across each of these dimensions. Under the terms of the agreement, Ardent will acquire Boone Health for a purchase price of approximately $47 million, subject to customary working capital and closing adjustments. The acquisition will be funded entirely with existing cash, demonstrating the strength and flexibility of our strong balance sheet. Boone will use the proceeds to retire all of its outstanding debt and satisfy other retained obligations.
Thus, Ardent will be inheriting a debt-free asset when the transaction closes. Additionally, we will fully own all associated real estate, which further strengthens our balance sheet. As Dave mentioned, we're committing to invest $200 million of capital over 10 years to support Boone's strategic growth initiatives. This equates to approximately 3%-4% of revenue over that time, which is consistent with our current standalone capital spending. Said differently, the $200 million commitment should be viewed as ongoing stewardship of the asset, not an incremental investment on top of the $47 million purchase price. Importantly, this transaction has a de minimis impact on our lease-adjusted net leverage profile. This allows us to maintain our strong balance sheet and capital deployment flexibility. Last, we expect to close the acquisition in the first quarter of 2027, subject to customary closing conditions.
From a shareholder perspective, we believe this acquisition represents a strong value creation opportunity. Our team has spent the last 12 months performing a full assessment of the value-enhancing activities and creating a detailed action plan for the Boone system. We have identified and quantified savings initiatives tied to specific projects and work streams, complete with timelines and specific ownership.
That playbook builds to our expectation that we will achieve at least $30 million of synergies in year three. The savings will begin in year one and ramp over time. Importantly, we have high confidence in executing our plans to realize this target. The synergies are primarily driven by cost efficiencies that leverage Ardent's scale, purchasing power, and operational strengths. We will capture them through proven integration levers, including supply chain procurement, revenue cycle optimization, vendor consolidation, and general administrative costs. Overall, the transaction strengthens and accelerates Ardent's earnings growth playbook.
We project Boone will generate $30 million-$40 million of Adjusted EBITDA in year three. In terms of cadence, we expect that in year one, the acquisition will be modestly accretive to our current 2026 Adjusted EBITDA guidance midpoint, ramping to 6%-8% accretion in year three. Looking further out, we see continued opportunity to enhance performance. The expected year three Adjusted EBITDA margin of 6%-7% shouldn't be viewed as the ceiling. We have plenty of room to advance profitability closer to our corporate average in the longer term. Tying this together from an investment standpoint, the $47 million purchase price represents a multiple of less than 2x our projected year three Adjusted EBITDA. We view this as a disciplined value-creating use of capital with a very attractive risk-reward profile.
As I mentioned earlier, the transaction also enables us to maintain significant balance sheet flexibility. Post-close, we will continue to hold a high level of cash, and there will be an immaterial impact on our lease-adjusted net leverage ratio, which currently sits at a conservative 2.5x. In terms of free cash flow, we project the business will inflect positive by year three. As I wrap up and summarize my final thoughts, we are excited about the opportunity ahead and confident in our ability to execute. Boone is an outstanding strategic fit, and together, we can deliver incremental value for our patients, communities, employees, and shareholders alike. The transaction validates our long-term growth strategy, diversifies our revenue, enhances our scale, and strengthens our earnings profile, driven by clearly defined synergies. Importantly, these strategic objectives are advanced with disciplined capital deployment aimed towards creating meaningful shareholder value.
We look forward to welcoming Boone Health to the Ardent family. With that, I will turn the call over to the operator for the question-and-answer session.
We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of A.J. Rice with UBS. Please go ahead, A.J..
Hi, everybody. I let you get away from our conference, and a day later, you are announcing a deal there. So congratulations on that. Interesting transaction. I just did a quick scan. It looks like they started the process in February, so it has gone on for a while. What was the motivating factor for them? Is it mainly to get a partner that can invest in the capital? Is that the $200 million commitment over 10 years? Is that the primary driver here, that they had some immediate needs, or just setting up long-term strategy? Any way to comment on what you are thinking that money is going to go to, and is that the primary reason why they were looking for a partner, I guess?
Hey, A.J., it is Dave. Your question about long-term partnership was really critical to Boone, as is the quality care and the culture that they have built here, and finding a partner that can sustain all three of those, which naturally fits into our growth and our mission and purpose very clearly. They saw us as a very strong partner.
Yeah, and just tailgating on Dave's comments, A.J., I think there is a recognition that operating as a standalone community hospital is increasingly difficult in the environment that we are in going forward. So, looking at the strength of Ardent, the strength of our balance sheet, and the alignment of the two cultures just made this for a transaction that made sense for both enterprises.
Okay, maybe just my follow-up. A 392-bed core hospital, that is a significant size. I know you have commented a little bit on Adjusted EBITDA. Can you give us a sense on the revenues? When you think about the staging of the synergies, I would think supply cost savings, given your involvement with the HealthTrust contract, is probably something that happens pretty quickly. What are some of the other things that build up over time to get to your ultimate target on the synergy target?
Sure. Thanks, A.J., t his is Alfred. Revenue is roughly half a billion, call it $500 million, just shy of that on a trailing 12. You are absolutely right from some more immediate terms, you can think of supply chain as something where Ardent's scale will certainly bring some near-term benefit, participation with HPG being one example. There are vendors that we have in common already today where we can bring best pricing very quickly into that equation. You can think of other areas that is going to take longer. Think of managed care contracting. Again, we think our scale and acumen in that area will make a difference, but that is going to play out over longer periods of time as those contracts expire.
Again, that is why we look at it as really a three-year journey, and we view that $30 million synergy number as a minimum commitment that we have already identified over that three years, and we will continue to look for other opportunities to strengthen Boone Health's operations.
Okay. Thanks so much.
Thank you.
Your next question comes from the line of Benjamin Rossi with JPMorgan. Benjamin, please go ahead.
Hey. Thanks for the question. For deals of this structure, can you just walk us through some of the upfront costs that go into ramping operations, and maybe how much of the planned $200 million capital commitment is intended for integration or startup needs versus facility modernization, service growth, and other investments? Thanks.
Sorry, Ben. We may need you to repeat the question. There was an interruption during your question.
Yeah. No problem at all. Basically, just on upfront costs for deals of this structure, obviously been a while. We haven't had the familiarity of seeing you enter a new market under this kind of deal structure. For the planned $200 million capital commitment, can you just break us down how that would maybe flow through expenses or CapEx, and how you're thinking about the integration or startup needs versus some of the longer-term modernization or service line growth opportunities and investments?
Sure. This is Alfred Lumsdaine. Yeah, we think, to answer your question a couple ways, the $200 million capital commitment, that's a 10-year commitment that will play out. You could likely think of that as ratable. As Dave Caspers indicated, that's largely going to be geared towards strengthening and growing and enhancing a currently strong set of capabilities at Boone Health, and help us drive growth in the near and long term. In terms of upfront costs, obviously there'll be some amount of integration costs. We wouldn't think that that would be material to our overall financial profile going into 2027. We talked about, from a cash flow perspective, we think that this will be break-even to accretive in year three.
Ben, it's Dave Styblo. A couple things to add onto that. To be clear, that $200 million is CapEx-related, and as we think about that over the 10-year horizon, that represents roughly 3%-4% of our revenue, which is very consistent with our current model. It's just really those investments, because the facility is relatively new and modern for some of the key parts that have been built up there in the main bed tower, allows us to really direct those investments towards growth activities. So we're excited about that. In addition, as we think about the capital commitment there's no timing or constraints on that, so that allows us some flexibility of what to do when, as we see the opportunities arise.
Great. Appreciate the details there, and sounds like a pretty well-designed plan in place for that $30 million synergy figure. When we think about the components of the $30 million, can you just give us a breakdown where you think it's coming from a cost side versus a revenue side? Thanks.
Sure. You can imagine, in terms of what we've identified today, the predominance is on the cost side, with only a relatively small amount on revenue cycle optimization. Although, we've already been working with Ensemble from an identification of what revenue cycle opportunities there could be in consolidation. But the preponderance are cost-related. We've touched on supply chain procurement being one, vendor consolidation being another. Those are the types of things that again, none of it is ever easy, but we do think we've got a really solid plan to ensure that $30 million is the minimum.
I think what's important also, Ben, is these items have been scored and identified. There's not really any blue sky-related activities here. So when we think about that CapEx commitment helping to drive growth and hopefully some market share gains over time, that would be upside to the at least $30 million of cost synergies for the transaction. So that would be not contemplated, to give you a sense of how we're thinking about the nature of the CapEx investments versus those synergies that we can already identify.
Your next question comes from the line of Whit Mayo with Leerink.
Hi, guys. This is Morgan McCarthy on for Whit. I just have a quick clarification question. That $30 million-$40 million of expected Adjusted EBITDA in year one, does that include synergies? Then just as a follow-up, the color that you gave around the synergies has been very helpful, but is there any way to give us a better sense of how much synergies might be realized in year one versus year three? Would those synergies be front-end weighted or back-end weighted? Thanks.
Sure. Thanks for the question, Morgan. This is Alfred. I just want to be very clear. The $30 million-$40 million EBITDA number is a year three EBITDA expectation. That is inclusive of our expectations for synergies. Therefore, our year one expectation from an EBITDA perspective is a very modest EBITDA contribution. You can think of that as $5 million-$10 million, and the synergies will ramp. I am not going to say exactly ratable, because as A.J.'s question indicated, there are some that are more immediately executable. But I think it is not unreasonable to think about it as relatively ratable over the three years.
Reminder to unmute your device if you had a follow-up.
Oh, sorry, no follow-up. Thank you so much.
Thank you.
Your next question comes from the line of Craig Hettenbach with Morgan Stanley. Craig, please go ahead.
Hi, everyone. Kate Bennorth on for Craig. I just have a question. I know you mentioned the 3.4% population growth. What is this in regard to your overall regional growth? Is it above, in line? What is the expansion opportunity in the region, maybe looking at ASCs or urgent centers?
First of all, good news. As we talked about our three-part strategy and our discipline work around M&A and ensuring it is the right market, almost every indicator in Boone Health represents midpoint of where we are or better, including population, just to be crystal clear about that. Secondarily, the growth opportunities, there are multiple. There are multiple, from hospital centers that are in surrounding counties to ambulatory build-out to full utilization of existing assets and getting that full ramp out of the opportunities that are there.
They exist in all three fronts with this. As you would imagine, a system of this size has been extremely strapped with capital and has been confined to manage with what they have. Good news is it is a great asset that is modern and doesn't require our capital to be spent on the facility itself, nor does it require us to spend capital immediately.
We are able to be positioned for growth in this area and to make disciplined choices with that growth.
Just tailgating on Dave's comments, the 3%-4%, that is going to be near the top of the markets we are in. That is multiples what the average of the U.S. grows. This market, and we think of Central Missouri as the market, not just Columbia, we think it is extremely attractive. There are a number of acute care providers and a lot of opportunity for continued strategic growth. We really view Boone as a potential hub for building a bigger presence in the region. Even though it is already a system, we think that the opportunity it creates to expand access, whether that is through ambulatory sites of care or other assets to the surrounding community, is profound. Again, I hope you hear the excitement we have towards coming into what is a very attractive market.
Yes. Great. Thank you. One follow-up, just double-clicking on that third pillar of growth. I guess as much color you can give, what is the M&A pipeline going forward in terms of more tuck-in acquisitions potentially? Is this sort of a one-off that the valuation was just very compelling, or is this a sort of a steady cadence of other deals you are evaluating?
As we described in great detail, first of all, yes, there are opportunities in the future to continue with our disciplined eye at what will or may become available, and we have positioned our financial situation to be able to take action when we see those. That is the good news in that situation. Secondarily, we have multiple strategies to engage with in the future. For today, for now, this is an important move for us to strengthen our portfolio, and we are going to be diligently focused on the success of this as we prepare to close in quarter one.
The other takeaway, I hope everyone will have from this is just how focused we are on finding the exact right fit of assets that meet our criteria for growth, that are the type of markets that we think are attractive long term, and that will align with our growth strategy for the long term. We are going to continue to be very disciplined as we look at both add-on assets and new markets, which again, our balance sheet allows us to continue to be very intense in the market, but also very disciplined to sticking to the markets that look like Ardent markets and that fit our criteria for growth.
Great. Thanks so much.
Thank you.
Your next question comes from the line of Matthew Gillmor with KeyBanc Capital Markets. Matthew, please go ahead. A reminder to unmute locally. Your next question comes from the line of Kevin Fischbeck with Bank of America. Kevin, please go ahead.
Hi, this is actually Joanna for Kevin. I guess first question about the payer mix for the hospital. I saw you said 93% of the population covered in the market, but can you help us understand the payer mix for this hospital? Is this Medicaid exposure, commercial Medicare, any ACA exposure, and also supplemental payment programs? Can you talk a little bit about that in this particular state at the hospital, how much, I guess, they're receiving annually from that program? Thank you.
Yeah, great question. Thank you for that. From a payer mix standpoint, we are excited because Boone has what we think is a very attractive payer mix, even compared across Ardent's book of business. The HIX as a percent of revenues exposure is only about 3%. The exposure to DPPs is de minimis. As we look out at the Big Beautiful Bill planned reductions, we do not see an impact to Boone's revenue profile. From a Medicaid perspective also, less than the Ardent corporate average. Again, we think the macroeconomic health of the area really supports a very strong payer mix profile.
Thank you. Follow up on the discussion around the $200 million capital commitment. You said no immediate need, so I just wanted to check, is there any such commitment that the hospital has made in the past, or it will be just pretty much up to Ardent to decide going forward how this money is allocated? Thank you.
Thanks, Joanna. The $200 million, there is nothing out of that that is committed. Now, we have already worked with the Boone management to identify nearer term items, but there is no existing commitments that that has to be applied to. So it really will allow us to come in with a blank sheet of paper and work on the highest area of needs that will contribute the greatest amount of impact to the community and to the growth of Boone Health.
Thank you.
Thank you.
Your last question comes from the line of Ben Hendrix with RBC Capital Markets. Ben, please go ahead.
Great. Thank you. I was just wondering if you could speak quickly about the 19 sites of care, those ancillary sites of care in the market, kind of where the strengths lay, if that's urgent care versus ambulatory versus imaging. What's the profile of those facilities, and where do you see the most obvious opportunities for deployment of that 200 to kind of round out capabilities in the market? Thanks.
You bet. First of all, the hospital itself, the 392 licensed beds, the facility is in great shape. It is about three-quarters of the way occupied in terms of its staff versus operational nature. That gives it ample room to be able to accept more patients as the ambulatory section is strengthened. There are 22 advanced surgical suites across this entire portfolio, represents about 859,000 sq ft and 17 and a half acres. The medical plazas and medical office buildings have ample room for growth, which we're excited about the opportunity to strengthen what that means as we strengthen inbound patient access to the surrounding communities.
Good news is when we look at a system like this, from the top of the funnel, which we mention at Ardent quite often is strong and healthy, strengthening the top of the funnel here is important because capacity exists in these assets for us to help support more patient access and greater volumes with very little necessary investment.
Thanks. I appreciate that. The last thing from me, has this been historically a beneficiary of 340B funding or not applicable?
Not applicable.
Okay, great. Thank you.
I'd say that's, again, that actually falls into all the criteria that we evaluated. What are the things that we're excited about? What are the risks to it? As Alfred talked about, when we analyze the payer risk, there's no real exposure to DPPs. The exchange risk is low. Medicaid is below our average. Then when you think about the OPPS final rule there, that could affect that side of the business. There's no material impact. Again, when we looked at all the positives and the potential risks, that's where, as we looked at the opportunity risks, it just really is a very well-balanced, favorable risk-return opportunity for us.
Being slightly more concrete on my answer, we do anticipate expanding the ED in short order. There is great patient demand, and the Boone Health team does a superior job with its care. So improving and simplifying and giving more access in the ED is critical. We are aligned with the plans and are eager to help make that access and volume get unlocked.
Your next question comes from the line of Benjamin Rossi with JPMorgan. Benjamin, please go ahead.
Wanted to get one quick clarification on ownership structure. I might have missed this, but in terms of ownership, is this going to be full, or what will your equity ownership be as part of the transaction?
It's full ownership. We do not have a JV partner.
Great. Thanks for clarifying.
Thank you.
Operator, I think we have one more question.
Last question is Matthew Gillmor with KeyBanc Capital Markets. Matthew, please go ahead.
Hey, good afternoon. This is Zach on for Matt. Just wanted to ask about Boone's IT. Are they currently on the Epic platform? Then any broader comments to share on what needs to be done from the IT integration perspective and the opportunity there? Thanks.
Great. Dave here. They are not on Epic platform today. We will determine the timing to place them on an Epic platform in the future. We believe in Epic as an asset that strengthens the combination between the consumer patient's needs and the ability to perform great care. As for the remainder of the IT platform, we believe they have Our diligence proves they have a strong platform. Our synergies are more in the savings that come from the shared synergies of being at scale and adjusting those contracts to accomplish such.
Great. Thank you.
You bet.
Thank you.
That concludes the question and answer session, and this concludes today's call. Thank you for attending. You may now disconnect.