PSYS Psychiatric Solutions, Inc. (MM)

Hospital company Universal Health Services Inc. (UHS) agreed to acquire Psychiatric Solutions Inc. (PSYS), a mental-health facility operator, for about $2 billion in cash.

The deal increases Universal Health's presence in behavioral health, doubling the number of such facilities operated by the company and making those operations about 45% of Universal's total revenue after the deal.

"From a strategic perspective, we believe this is truly a transformative transaction for UHS," Chief Financial Officer Steve Filton said on a conference call Monday. Universal also operates more than 20 hospitals.

Universal will pay $33.75 a share for the deal, a 41% premium to Psychiatric Solutions' closing price on March 9, the day before The Wall Street Journal reported the company was in takeover talks with Bain Capital. Universal also will assume about $1.1 billion of Psychiatric Solutions' debt, giving the deal a total value of $3.1 billion.

Universal Health shares rose to an all-time high of $43.47 Monday as the acquisition broadens its business, adds to earnings and provides the potential for future cost benefits.

Psychiatric Solutions' stock recently dropped 24 cents to $32.39. Because a deal for the company had been expected, the final price offers only a 3.4% premium to Psychiatric's closing price Friday of $32.63, which was near its highs from late 2008.

The deal--expected to close in the fourth quarter--will "diminish geographic concentration risk" for Universal by building on its presence in 32 states and adding locations in five additional states, Filton said.

Excluding costs, the deal will "significantly" increase the company's earnings per share, Filton said. It will generate $35 million to $45 million in annual cost synergies within three years after closing, with the majority in the first two years.

In addition, Universal believes that it can find additional cost savings. "There is a real opportunity to apply our managerial and operational expertise to improve PSI's operating margins, which have historically been 200-250 basis points lower than ours," Filton said.

In 2009, the two companies had a combined revenue of more than $7 billion, with Universal at $5.2 billion. That combined number could rise to $7.4 billion this year and $8.1 billion for 2012, based on the companies' average analyst estimate from Thomson Reuters.

In order to pay for the deal and refinance some outstanding debt, Universal has obtained $4.15 billion in committed debt financing from J.P. Morgan and Deutsche Bank.

The company will use its strong cash flow, and that of Psychiatric Solutions, to reduce the debt load in the near-term.

Universal stressed that its debt levels are below those of its peers in the industry, and it has no plan to raise money by issuing shares.

-By Thomas Gryta, Dow Jones Newswires; 212-416-2169; thomas.gryta@dowjones.com

(Jennifer Cummings contributed to this article.)

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