Tenet Is in Discussions for Possible Takeover of Australia's Healthscope
Tenet Confirms Talks for Acquisition of Healthscope
Luis Enrique Ascui/Bloomberg
Tenet is considering a take-over of Healthscope.
Tenet is considering a take-over of Healthscope. Photographer: Luis Enrique Ascui/Bloomberg
Tenet Healthcare Corp. said it’s in talks about a possible purchase of Healthscope Ltd., Australia’s second-largest hospital operator, as it seeks to tap rising spending on private health care.
“Recent volatility” in the trading of Tenet prompted the company to confirm the discussions, the Dallas-based hospital operator said yesterday. Healthscope said on May 31 it received two offers at A$5.80 a share, or A$1.84 billion ($1.5 billion), after previously announcing a A$5.75-a-share bid.
Healthscope has about 15 percent of Australia’s private- hospital market, where spending is expected to rise “for the foreseeable future,” Tenet said. The company would need to borrow to fund the acquisition of Melbourne-based Healthscope, derailing efforts in the past year to cut more than $4 billion of debt, according to Raymond James & Associates Inc.
Tenet placed “significant focus” on repaying borrowings and boosting earnings after “several years of elevated debt levels and significant cash-flow burn,” Raymond James analysts including John Ransom wrote in a note yesterday.
At A$5.80 a share, the price including debt may total $2.1 billion, which is “a lot to spend/borrow for a transaction that looks -- in the short term -- to be approximately neutral to earnings,” they said.
Shares Fall
Healthscope fell 0.4 percent to A$5.55 in Sydney trading today, giving the company a market value of A$1.76 billion. The shares have gained 23 percent since the first offer was announced on May 14. The offer per share from Tenet is 29 percent more than Healthscope’s closing price on May 13, the day before the first bid was announced.
Tenet fell 17 percent to $4.72 in New York Stock Exchange composite trading yesterday, the stock’s biggest decline since Nov. 20, 2008.
The transaction would be a “clear negative” and an “odd strategic departure in many ways” for Tenet, Whit Mayo, a Nashville-based analyst at Robert W. Baird & Co., wrote in a note yesterday. Mayo cut his recommendation on the stock to “neutral” from “outperform.”
Healthscope hasn’t identified its bidders. The company received the A$5.75-a-share offer from Blackstone Group LP, TPG Capital and Carlyle Group, according to a person familiar with the matter.
Pacific Equity Partners and Bain Capital LLC may join Tenet’s bid for Healthscope, the Australian Financial Review reported yesterday, without saying where it got the information. Kohlberg Kravis Roberts & Co. and CVC Asia Pacific Ltd. made a separate offer, according to the report.
Payment Defaults
Under Australia’s health-care system, private hospitals generally serve patients who choose to buy their own insurance or pay for hospital care, Tenet said. Purchasing Healthscope “would improve Tenet’s payer mix and enhance Tenet’s margins and growth rates,” the company said in its statement.
Bad debt expenses, a reflection of the number of people not paying hospital bills, rose 7.3 percent to $176 million in the quarter ended Dec. 31, equivalent to 7.9 percent of revenue, Tenet said in February. The company, which had debt of $4.27 billion at the end of 2009, said it expects bad debt expenses to rise as much as 8.8 percent this year.
Moody’s Investors Service cut the rating on Tenet’s bonds to B2 from B1 in September and said the company may struggle to reduce debt in the near term, “given the expectation of limited free cash flow and the continuation of operating challenges.”
Healthscope said May 31 it’s allowing the new bidders to review its financial accounts.
The company’s annual net income has grown an average 36 percent during the past nine years, according to data compiled by Bloomberg. Healthscope has an operating margin of 10.5 percent, making it more profitable than larger Australian rival Ramsay Health Care Ltd., with 8.9 percent, and Tenet, with 6.6 percent, the data show.
Tenet is the third-largest publicly held U.S. hospital chain, with 49 facilities.
Healthscope owns or operates 43 hospitals in Australia, including the Prince of Wales Private Hospital in Sydney’s eastern suburbs and Melbourne Private Hospital on the fringe of the city’s central business district. It also runs the Gribbles pathology chain in Australia, New Zealand, Malaysia, Singapore and Mauritius.
To contact the reporters on this story: Simeon Bennett in Singapore at Sbennett9@bloomberg.net; David Olmos in San Francisco at dolmos@bloomberg.net.
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