February 09, 2014

Founder

Game Theory Suggests $CYHHZ Could Be a Multi-bagger

Note: This is a micro-cap idea and therefore likely to have high volatility.

(Trading at 4 cents per CVR, I think this situation presents an extremely

compelling risk/reward mix, so

long as you aren't deterred by the fact that at its current price, the total market value of these CVRs is

$11 million and being micro

cap, they will be quite volatile.)

First, some facts:

1. On January 27, 2014, Community Health Systems (CYH) completed its acquisition of Health

Manag

ement Associates (HMA).

As part of the transaction, HMA shareholders were issued (pro

rata)

264.5 million CVRs (CYHHZ).

These CVRs are listed on the NASDAQ.

Following a final resolution of existing litigation against HMA, a holder of a CVR will be ent

itled to a

one

time cash payment of up to $1.00 per CVR, subject to reduction as follows:

If the aggregate amount of losses exceeds $18 million, then the amount payable will be reduced by an

amount equal to the quotient obtained by dividing: (a) the produc

t of (i) all Losses in excess of the

Deductible and (ii) 90%; by (b) the number of CVRs outstanding on the date on which Final Resolution of

the Existing Litigation occurs.

So for example, if CYH can resolve all the litigation for a total expense/settlemen

t of $50M and all

264.5M CVRs were outstanding at the time, then the payoff would be equal to $0.89 per CVR.

As an illustration, here is a table with combinations of potential payoff amounts and losses assuming

264.5M CVRs remain outstanding:

Loss

)

Payoff

per CVR

Potential

Return

$18

$1.00

2400%

$20

$0.99

2383%

$50

$0.89

2128%

$100

$0.72

1702%

$150

$0.55

1277%

$200

$0.38

852%

$250

$0.21

426%

$300

$0.04

$312

$0.00

100%

For purposes of the CVR agreement, the term “Losses” means the amount of all losses, damages,

costs, fees and expenses (including, without limitation, attorneys’ fees and expenses), and all fines,

penalties, settlement

amounts, indemnification obligati

ons and other liabilities, in each case arising out

of or relating to the Existing Litigation that are paid by CHS or any of its affiliates (including HMA) at any

time prior to the CVR Payment Date.

However, Losses will not include (i) the costs associated

with any change to HMA’s policies, procedures

or practices, or (ii) the loss of any (A) licenses or (B) rights and privileges to participate in government

sponsored programs even if required under a settlement agreement, consent decree or other final non

appealable judgment by a court of competent jurisdiction. The amount of any Losses shall be net of any

amounts actually recovered by CHS or any of its wholly owned subsidiaries under insurance policies.

The CVRs are not equity or voting securities of CHS, do not represent ownership interests in CHS and

holders of the CVRs are not entitled to any rights of a shareholder or other equity or voting security of

CHS, either at law or in equity. The rights of

the CVR holders will be limited to those expressly provided

for in the CVR agreement.

The CVR agreement expressly permits CHS or any of its subsidiaries or affiliates to acquire some or

all of the CVRs, whether in open market transactions, private tran

sactions or otherwise. Prior to any

acquisition of any CVRs, CHS must publicly disclose the amount of CVRs which it has been authorized

to acquire. CHS must also report in its quarterly reports the amount of CVRs it has been authorized to

acquire as well a

s the amount of CVRs CHS has acquired, in each case as of the end of the quarterly

period reported in such quarterly report.

“Existing Litigation” means any litigation, investigation (whether formal or informal, including

subpoenas), or other action or

proceeding involving the HHS

OIG, the DOJ, the Commission or any other

Governmental Entity, relating to whether HMA or any of its Affiliates violated any Law, and any civil

litigation or other action or proceeding, including any shareholder or derivative

action or proceeding,

arising out of or relating to the foregoing, in each

case existing on or prior to the date of the Merger

Agreement; provided that Existing Litigation shall not include any such litigation, investigation or other

action or proceeding i

nvolving only individuals or entities other than HMA unless HMA is required to

indemnify Losses incurred by such individuals or entities. For the avoidance of doubt, for purposes of

this definition, the Company and its Subsidiaries shall not be considered

Affiliates of HMA.

I have summarized above what I considered to be the most important points.

However, if you decide

to get involved, I strongly recommend that you review the

CVR Agreement

Now Conjecture:

8. The timing or magnitude of a final settlement of all the litigation is an unknown

no one has a crystal

ball, not Community Health, not the regulators nor you and I.

That said, I can

make certain assumptions.

9. First lets think about how or why the range of potential losses was set between $18M and $312M.

have to assume that the sellers (HMA) would have wanted the potential losses to be set at near zero to

obtain the maximum price

for the company.

On the other hand, CYH management must have done its

due diligence to estimate the potential settlement amount and then left itself some cushion or margin

of error to subtract the maximum amount that it could from the purchase price.

Tha

t still doesn't mean

that the ultimate settlement couldn't be in excess of $300M but at least it provides me with the notion

that some amount of work must have been done by CYH management to handicap future losses.

10.

Now let's turn to timing.

Regardles

s of who did what, now all this litigation is CYH's problem.

Consequently, until it is resolved, the company will have to include in its SEC filings all this dirty laundry,

each para ending with "At this time, we are unable to determine the potential impa

ct, if any, that will

result from the final resolution of these investigations."

Now I don't know about you, but as a prospective investor in a company, when I see a rather longish

section titled "Legal Proceedings" with a lot of statements ending that way

, it doesn't give me a warm

and fuzzy feeling.

Suffice to say, CYH will try and resolve these matters as swiftly as possible.

11.

So now I turn to the most important question

will CYH management be motivated to pay its

maximum estimated amount ($300M)

and get this over with quickly because regardless of whether it

pays zero or up to $300M, any resulting savings are passed through to the holders of these CVRs.

12.

At this point, I can't answer this question.

However, I will be closely watching (a) whe

ther the

company authorizes a CVR buyback (b) begins buying them back (c) commences a tender offer for them

and (d) the holders list which wont become available until mid

May 2014.

I will specifically be looking

for what Larry Robbins at Glenview does wit

h his CVRs since he received almost 15% in the merger.