CHICAGO/NEW YORK Community Health Systems Inc (CYH.N) sweetened its $3.3 billion offer for Tenet Healthcare Corp (THC.N) on Monday, persisting with its hostile bid even as revelations of a U.S. government probe into Community's billing practices sent its shares lower.
Community Health, whose shares fell over 4 percent on Monday, changed its $6 per share offer to all cash from $1 in Community Health stock and $5 in cash, meaning Tenet shareholders would not be vulnerable to risks associated with Community's shares.
Tenet, which had rejected Community Health's initial offer as too low, said in a statement that it would review the revised proposal.
Shares of Community Health, the second-largest U.S. hospital chain, have dropped sharply in the past week after hospital operator Tenet accused Community Health of admitting patients for needless stays and bilking the U.S. government and private insurers.
"I think Community Health was forced to do something today," said Jefferies analyst Arthur Henderson.
"By moving to an all-cash offer, it effectively says: 'Okay, we don't necessarily have to get you the answers to these questions by the shareholders' meeting. We don't necessarily have to respond to the degree that would be required if a dollar of Community Health stock were offered.'"
In an unusual lunge at a hostile suitor in a takeover battle, Tenet filed a lawsuit on April 11 accusing Community Health of admitting up to 82,000 patients between 2006 and 2009 who would have been sent home by other hospitals.
Community Health disclosed on Friday that the U.S. government had subpoenaed the company in connection with an investigation of possible improper claims submitted to Medicare and Medicaid, hitting its stock further.
Community Health Chief Executive Officer Wayne Smith said in a statement on Monday that converting the offer to all cash "underscores our commitment to completing this transaction and renders Tenet's irresponsible and inaccurate lawsuit irrelevant to our offer. Tenet is the No. 3 hospital operator in the United States.
"We are confident that our business practices are appropriate, and we will respond in detail to Tenet's claims in due course," Smith said.
Tenet shares fell 4 percent on Monday, reflecting growing investor skepticism about Community Health's ability to get the deal done, analysts said.
"I don't see how changing this offer to all-cash will sway Tenet's board," said Morningstar analyst Michael Waterhouse. "I expect it to be status quo going forward until Community Health decides to pay up and increase the offer before shareholders eventually vote on the deal."
Henderson, who pegs fair value for Tenet at $9.50 a share, said Tenet has ample room to improve its margins and drive value over the next couple of years.
"There is no question in my mind that Tenet is worth much more than $6 a share," Henderson said. "The all-cash offer in many respects doesn't do anything for me."
Analysts at Susquehanna wrote in a research note that investors have been asking if Community Health would be able to finance its bid now. They wrote that they did not believe the company's earnings power would change materially even if Tenet's allegations proved to be true.
Community Health said its financial advisers, Credit Suisse (CSGN.VX) and Goldman Sachs (GS.N), were highly confident that the company could obtain financing for the all-cash offer for Tenet in the capital markets.
Analysts were surprised that Community Health had not mentioned the subpoena earlier last week.
"Amazingly (Community Health) management spoke with shareholders and analysts during all of last week about the (Tenet) allegations without disclosing it was already under investigation for something potentially similar," analysts at Leerink Swann wrote in a research note.
Oppenheimer analysts said "not only does the subpoena add the risk of the government potentially finding wrongdoing, it also raises questions regarding management's credibility as they hid this vital piece of information from investors."
In addition to the takeover bid, Community Health has said it intends to present a full slate of 10 independent director nominees for election to Tenet's board at its 2011 annual meeting.
That meeting has been delayed until November 3, and the entire board is up for re-election, Community Health said.
CtW Investment Group, which advises union pension funds on corporate shareholder votes, on Monday said it will recommend Community Health investors vote against directors seeking re-election at Community's May 17 shareholder meeting unless the board provides a compelling response to concerns about Community's aggressive Medicare billing practices.
Community Health said on Monday that it would release its first-quarter earnings on April 27 and discuss Tenet's allegations on a conference call April 28.
At Friday's close, Community Health shares were down 21 percent from their closing price before the lawsuit was filed. In afternoon trade on Monday, its shares were down 4.4 percent, at $30.49. Tenet's shares were down 1.2 percent at $6.58.