Community Health’s Bid for Tenet May Prompt Rivals

Community Health Makes $7.3 Billion Bid for Tenet
The former headquarters of Tenet Healthcare Corp. are pictured in Dallas. Photographer: Mike Fuentes/Bloomberg

Community Health Systems Inc.’s unsolicited $3.3 billion offer for Tenet Healthcare Corp. may prompt rival suitors as it seeks to become the largest U.S. hospital operator. Tenet’s shares rose 55 percent.

Community Health’s bid of $6 a share, including $5 a share in cash and $1 per share in common stock, was rejected as “not remotely fair value” by Dallas-based Tenet. The equity offer of $3.3 billion would represent about a 40 percent premium over Tenet’s $4.29 closing price yesterday. Community Health also would take on about $4 billion of net debt, the Franklin, Tennessee-based company said yesterday in a statement.

Community Health has been an aggressive buyer, making eight acquisitions in the past two years. Mergers have increased in the industry as hospital patient admissions slowed in the struggling economy and U.S. regulations have prompted operators to seek partnerships, said Sheryl Skolnick, an analyst at CRT Capital Group in Stamford, Connecticut.

“We are absolutely committed” to the Tenet deal, Wayne Smith, Community Health’s chief executive officer, said today in a conference call with analysts. “We have been accused of being opportunistic, and we are. That’s what we do and we will continue to do it.”

Tenet rose $2.36, or 55 percent, to $6.65 at 4 p.m. in New York Stock Exchange composite trading. The price, higher than Community Health’s bid, may indicate investors expect another offer. Before today, Tenet had fallen 20 percent this year.

315 Deals

There have been 315 acquisitions in the U.S. hospital industry in the past five years with an average purchase price of $589 million and an average premium of 8 percent, according to data compiled by Bloomberg. Community Health, with 15 acquisitions, has made the most purchases of any company during that time.

Community Health, the largest publicly traded U.S. hospital company, gained $4.25, or 13 percent, to $35.89 in New York trading, its biggest one-day percentage gain since April 2009. Before today, the shares had dropped 11 percent for the year.

Community Health’s bid may eventually top $7 a share, said Jason Gurda, a Leerink Swann & Co. analyst in New York, in a note to clients today. At that price, the deal may add “slightly” to Community Health’s earnings next year or even reduce profit, depending on cost-savings and the interest rate on new debt the acquirer would have to issue, he said.

Higher Offer

Community Health “would most likely be willing to raise its offer” and Tenet shareholders frustrated by their current share price “are likely to accept a deal,” Gurda said.

Tenet, which operates 50 hospitals in 12 states, had a market capitalization of $2.1 billion as of the close of trading. Community Health had a market value of $2.9 billion.

“It remains to be seen if Community is the only bidder because Tenet is now in play,” Skolnick said yesterday in a telephone interview.

Other possible acquirers include Vanguard Health Systems Inc., a Nashville, Tennessee-based hospital operator. Medical insurers United HealthGroup Inc. or Humana Inc. might want to acquire hospitals to enhance their competitiveness under U.S. health reform proposals, Skolnick said.

“Health plans have generally said they are not interested in buying whole hospital companies,” Skolnick said. “At some point in the future they might have to think about being more like Kaiser and vertically integrated.” Kaiser Permanente, the largest U.S. non-profit health management organization, operates health plans, medical groups and hospitals.

Balance Sheet

Tenet had strengthened its balance sheet the past few years, upgrading its hospitals and improving the quality of its patient care while trimming costs, Skolnick said in Nov. 30 interview. The share price hasn’t reflected those improvements, she said.

“A lot of the heavy lifting has been done,” she said.

Community Health may need to raise its bid to $7.25 to $8.25 a share to get a deal completed, Skolnick wrote today in a note to investors.

“We see the Community Health bid as wholly insufficient and agree wholeheartedly with Tenet’s board’s rejection of the offer,” Skolnick wrote.

Community Health’s offer is “fully priced” at $6 per share, said CEO Smith. “If you look at what people have paying for hospitals over the last couple years, it’s been a lot less than this.”

Impact on Others

The offer may prompt deals among other hospital companies, Gurda said. Health Management Associates Inc. of Naples, Florida, climbed 39 cents, or 4.3 percent, to $9.53 in New York trading, while Brentwood, Tennessee-based LifePoint Hospitals Inc. rose $1.81, or 5 percent, to $37.40.

Community Health owns, operates or leases 126 hospitals in 29 states. It made the purchase offer to Tenet’s directors on Nov. 12, the company said in its statement. After Tenet rejected the bid on Dec. 6, Community Health’s Smith sent a follow-up letter to Trevor Fetter, Tenet’s chief executive, and the company’s board.

“We were surprised and disappointed by your flat rejection of the transaction,” Smith wrote in the letter. “We are committed to completing this transaction and will consider all alternatives necessary to do so.”

Largest Operator

The combined companies would have revenue of $21.9 billion, according to Community Health. It would become the nation’s largest hospital operator, surpassing closely held HCA, which was purchased four years ago in a $33 billion leveraged buyout led by KKR & Co. and Bain Capital LLC.

Tenet said the offer undervalued its business and it had little faith that Community Health could manage the deal.

“Community Health’s opportunistic proposal would transfer the growth potential inherent in Tenet to Community Health without adequately compensating Tenet shareholders,” Tenet said yesterday in a statement. Tenet’s board “has serious concerns about Community Health’s ability to integrate and operate a business like Tenet.”

The proposal would create a company with more than $15 billion in debt, Tenet said in the statement. Community Health had $567 million in cash and $10.3 billion in debt as of the end of the third-quarter, according to Bloomberg data.

“Community Health’s leverage following your proposed transaction would be higher than all but a handful of companies in the Standard & Poor’s 500,” Tenet said in its statement.

Community Health’s biggest acquisition of the past five years was its $6.37 billion purchase of Triad Healthcare Corp. 2007. The company has paid an average premium of 9.8 percent on the 15 acquisitions during the period.

Credit Suisse is Community Health’s financial adviser and Kirkland & Ellis LLP is providing legal advice. Barclays Capital is financial adviser to Tenet.

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