Tenet to Buy Vanguard Health for $1.8 Billion in Cash
Tenet Healthcare Corp. (THC) agreed to buy hospital operator Vanguard Health Systems Inc. (VHS) for about $1.8 billion in cash to grow in new markets as the U.S. health-care overhaul promises to expand insurance coverage to more Americans starting next year.
Tenet, the third-biggest publicly traded U.S. hospital chain, will pay $21 a share, the companies said today in a statement. That’s 70 percent above the $12.37 closing price on June 21 for Nashville, Tennessee-based Vanguard Health. Tenet also will assume $2.5 billion of debt, the companies said.
The acquisition will allow Tenet to accelerate cost-reduction efforts, a hallmark of health-care reform, Chief Executive Officer Trevor Fetter said in an interview. Investors should expect more acquisitions in the future, he said.
“It’s a great strategic opportunity and I’m excited about it,” Fetter said. “It comes at a critical point in time on the eve of the Affordable Care Act. I love the opportunity to double revenue in Texas.”
The purchase gives Dallas-based Tenet 28 hospitals in the Chicago, Phoenix, Detroit, Boston and San Antonio, Texas, regions. When the sale closes, Tenet will operate 79 hospitals and 157 outpatient centers, and gain $100 million to $200 million a year in savings, the company said.
“This was a surprise to most investors,” said Brian Tanquilut, an analyst at Jefferies & Co. in Nashville, Tennessee. “I don’t think the Vanguard asset was speculated on as something that was for sale. People were so focused on Health Management Associates,” the Naples, Florida-based hospital operator that has been the subject of takeover speculation.
“The synergies that Tenet is forecasting -- $100 to $200 million -- is a good number,” Tanquilut said in a telephone interview. “At the end of the day, this is a positive for Tenet. It’s an accretive deal off the bat. It increases their scale, which is important in the new world of health care.”
The acquisition is expected to add to earnings in the first year, the companies said. Tenet gained 4.5 percent to $43.73 at the close in New York. Vanguard rose 67 percent to $20.70, reflecting Tenet’s offer.
President Barack Obama’s Affordable Care Act may extend insurance over the next decade to about 27 million people who are currently uninsured. The Congressional Budget Office estimates that 8 million more people will enroll in Medicaid programs next year because of the expansion, which raises the income eligibility limits.
The acquisition will benefit Tenet because they and Vanguard serve distinctly different markets, Fetter said today in a conference call. The agreement has been in the works for months, he said.
“We will have new opportunities to actively manage our portfolio across a spectrum of assets” Fetter said. “We will now be No. 1 or No. 2 in 19 key markets.”
The Vanguard acquisition would be the company’s biggest since it bought American Medical Holdings for $3.35 billion in 1994. In 2011, Tenet rejected a $7.3 takeover bid from Community Health Systems Inc.
The acquisition opens “an important new avenue of growth among not-for-profit health systems where Vanguard has built a tremendous reputation for being a creative strategic partner,” Fetter said in the statement. “At this time of unprecedented change in health care, we believe the combined company will be well-positioned to lead the transformation.”
Blackstone Group LP, a 38 percent owner and Vanguard Health’s largest shareholder, will collect $617 million from the sale. The New York private-equity firm purchased a majority stake in 2004 in a leveraged recapitalization that valued Vanguard at $1.25 billion, according to regulatory filings.
Including about $493 million it previously received from a 2011 dividend and 2010 share repurchase, Blackstone will reap a return of about $1.1 billion. That’s about 2.2 times its original $495 million equity investment.
Blackstone spokeswoman Christine Anderson declined to comment.
In an interview in February, Tenet’s Fetter said he expected the 2010 health-care law to spur more consolidation among hospitals because of its push for better coordination and cost controls. The law’s insurance exchanges open for registration in October and start coverage in January.
“The pressures are pretty intense,” Fetter said then.
Vanguard raised $450 million two years ago in an initial public offering. The company had gained 1 percent this year, compared with a 19 percent increase for the Russell 2000 Health Care Index through June 21.
“The deal seems reasonably priced,” said John W. Ransom, an analyst at Raymond James & Associates in St. Petersburg, Florida, in an e-mail. “But investors will have concerns about the exposure to the Detroit market and Vanguard’s anemic/erratic historical results.”
Bank of America Corp. (BAC) has agreed to finance the acquisition, which will probably close before the end of the year, the companies said. Lazard Ltd. acted as lead financial and strategic adviser to Tenet, which got legal advice from Gibson Dunn & Crutcher. Bank of America, Barclays Plc and Teneo Capital also advised Tenet.
Skadden, Arps, Slate, Meagher & Flom served as Vanguard’s legal counsel and JPMorgan Chase & Co. was financial and strategic adviser.
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