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Tenet Falls on Doubts Community Health Bid Can Seal Takeover

Tenet Healthcare Corp. declined in New York trading as investors bet Community Health Systems Inc.’s $4.07 billion offer for the rival hospital chain won’t result in a takeover.

Tenet fell 24 cents, or 3.5 percent, to $6.69 at 4:01 p.m. in New York Stock Exchange composite trading. Franklin, Tennessee-based Community Health said in a statement today that it raised the unsolicited offer for Tenet by 21 percent, to $7.25 a share in cash.

Community Health said the bid to create the biggest U.S. hospital chain was its “best and final offer” and would expire unless “good-faith discussions” begin by May 9. Dallas-based Tenet accused its competitor on April 11 of overcharging the U.S. Medicare program at least $280 million in a lawsuit and said a government probe of the allegations would raise questions about whether Community Health could finance the takeover.

“People believe this is not going to get done, and without the potential of being acquired by Community Health, you really lose the support for Tenet’s stock,” Michael Wiederhorn, an analyst at Oppenheimer & Co. in New York, said in a telephone interview.

Tenet traded as high as $7.70 on April 1. Community Health dropped 51 cents, or 1.7 percent, to $30.22.

Today’s offer is 4.6 percent higher than Tenet’s closing price on April 29 and is based on the number of diluted shares. It doesn’t include about $4 billion in net debt on Tenet’s books that Community Health would assume in a deal. Community Health originally offered $5 a share in cash and $1 a share in stock, which Tenet rejected in December.

‘Grossly Undervalued’

Shareholders should take no action while Tenet’s board reviews the offer, the company said in a statement. Past offers had “grossly undervalued” the company, it said.

The hospital operator also asked the U.S. District Court to expedite discovery in the lawsuit against Community Health, according to a separate filing with the U.S. Securities and Exchange Commission today.

Community Health may have trouble raising the cash for the proposed acquisition and could be “subject to liability and damages of well over $1 billion” for its Medicare practices, Tenet’s lawsuit said. Community Health today reiterated it is confident financing can be obtained.

Community Health’s language on financing the deal today was weaker than in past statements, signaling the deal is less likely, said Oppenheimer’s Wiederhorn.

In an April 11 statement, Community Health said that financial advisers Credit Suisse and Goldman Sachs Group Inc. “have reaffirmed their confidence in financing the transaction.” Today’s statement said the two were “highly confident that financing for CHS’s offer can be obtained in the capital markets.”

Likely Rejected

“The $7.25 all cash bid is likely to be rejected,” said Sheryl Skolnick, an analyst with CRT Capital Group LLC in Stamford, Connecticut. “We have serious doubts as to how Community Health would be able to obtain the financing given the unfolding of recent events,” including a U.S. Justice Department probe of the Medicare allegations.

Brooke Gordon, a Community Health spokeswoman, didn’t immediately return messages seeking comment on the financing language or Tenet’s legal filing today.

Community Health said in an April 15 filing that it had been subpoenaed by the U.S. Department of Health and Human Services in an investigation of its billing of the Medicare and Medicaid insurance programs. The agency has requested documents related to emergency room procedures, including use of a software system that helps make decisions about when patients are admitted to the hospital, Community Health said.

Texas Request

The Texas Attorney General’s office also requested information about the hospital chain’s emergency rooms in November, Community Health said in the filing.

Community Health said in a separate statement that it was buying Mercy Health Partners of Scranton, Pennsylvania in a deal that includes three hospitals. Terms of the acquisition weren’t disclosed.

There have been 925 deals in the hospital industry over the last five years, with an average size of $268.9 million and an average premium of 36 percent, according to data compiled by Bloomberg. The largest was the 2006 purchase of HCA Inc. for $32.2 billion by a private-equity group including Bain Capital LLC, KKR & Co. and Merrill Lynch & Co. Inc.

-- With assistance from Pat Wechsler in New York. Editors: Chris Staiti, Angela Zimm

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