HealthSouth Ponders Spin-Offs

HealthSouth Corp. said Monday it may shed its hallmark rehabilitation business and other segments to focus on post-acute care as it reported declining revenues from a year ago but lower losses.

HealthSouth, which started as an outpatient rehabilitation chain and diversified through a growth period that ended in a huge accounting fraud, said it is considering divesting its outpatient rehabilitation division, its surgery centers and diagnostic division.

The proceeds would be used to pay off debt, and HealthSouth would be left to focus on its inpatient side, which accounted for about 58 percent of its profits for the last quarter.

Second-quarter revenue fell 4 percent to $787.5 million from $818.3 million last year.

The company reported a loss of $51.7 million, or 13 cents per share, from $62.4 million, or 16 cents per share, a year ago. Results for the latest quarter included preferred dividends of $9.2 million.

Analysts surveyed by Thomson Financial expected break-even per share on revenue of $792.2 million.

The company said the improvement resulted from cost controls.

Chief executive Jay Grinney said HealthSouth is considered alternatives including a spinoff or sale of its underperforming divisions. He said HealthSouth will become a "pure play" post-acute company.

"With the aging of our nation's population and the highly fragmented nature of the $125 billion post-acute market, we recognize there are significant growth and consolidation opportunities in the post-acute sector," Grinney said in a statement.

HealthSouth has hired Goldman, Sachs & Co. (GS) to assist with the possible divestment, which is expected to take about a year.

Also, the company said it will resubmit to be listed on the New York Stock Exchange, and announced a one-for-five reverse stock split. The company has about 398.2 million outstanding shares that would consolidate into 80 million shares.

The Birmingham-based HealthSouth is struggling to overcome both changes in government reimbursement rules and the lingering effects of a long-running, $2.7 billion accounting fraud.

The report was only the second earnings statement since the company became embroiled in scandal in 2003.

Fifteen former executives pleaded guilty to falsifying financial records, and a 16th was convicted by a jury. HealthSouth founder and longtime CEO Richard Scrushy was ousted, but jurors acquitted him last year on all charges.

Scrushy was subsequently convicted in a government bribery scheme linked to his time at HealthSouth.