Tenet acquisition of Vanguard puts M&A deal in pipeline

Mon Jun 24, 2013 11:17am EDT

NEW YORK, June 24 (IFR) - Tenet Healthcare joined the high-yield pipeline of M&A deals on Monday, announcing plans to acquire smaller rival Vanguard Health Systems for USD4.3bn, including the assumption of USD2.5bn of debt.

Despite what has become a very unfriendly environment for issuers as global markets take a beating, however, market participants expect this deal to find strong demand.

Tenet said it has committed financing in place from Bank of America Merrill Lynch and intends to refinance the debt of Vanguard at what it said would be attractive levels. The deal is expected to close by the end of the year.

According to the regulatory filing, Bank of America has committed to provide a USD1.8bn senior secured term facility and a USD2.8bn senior unsecured bridge credit facility for the debt financing. Upon consummation of the merger, Tenet will issue high-yield senior unsecured notes in lieu of a portion of, or all of, the drawings under the senior unsecured bridge facility.

Sheryl Skolnick, co-head of research at CRT Capital, said that Tenet is looking at refinancing the USD2.5bn of Vanguard debt given that the bulk of that paper is 8% and 7.75% notes.

"If the combined leverage ratio is in the mid 5s, then they should be paying in the mid 6% area, not high 7% or 8%," she said.

With the 8K out this morning, market participants expect the bridge syndication will begin soon. But while the market has definitely become a very unwelcoming place for issuers, Tenet has some time before the deal's closing for the markets to potentially stabilize.

"Bridge financing can be expensive, but it would be more expensive to not do this deal," said Skolnick. "With the kind of cash flows they will be looking at in 2014, they shouldn't have any trouble getting this done."

Tenet said the acquisition will take the company into new geographic markets, expand the breadth of its service offerings, diversify its earnings sources and increase the benefits it expects to realize under healthcare reform.

"This deal makes sense, and it makes sense because you create a path to growth for Tenet, the companies are culturally very similar, and it creates expansion in key fast growth states like Texas," said Skolnick.

"It's a well-priced and thoughtful deal that makes sense for both parties, even separate and apart from reform."

In addition to the acquisition, Tenet said, it will maintain its share repurchase program this year, estimating it will buyback USD200mn in the second half of 2013.

Tenet projects its pro forma debt/EBITDA leverage ratios will decrease in the first year after closing and are estimated at 4.75x-5.0x by the end of 2014. In the longer term, the post-acquisition leverage target is 4.25x-4.75x.

In May, Moody's said Tenet's B1 corporate family rating reflected its modestly improving free cash flow, but that the company could face difficulties in "meaningfully reducing leverage due to the many challenges facing the sector".

This factor is likely to restrain Moody's from any upgrade actions in the near term.

The ratings agency did warn of a potential downgrade if there was an expectation that debt to EBITDA will be sustained above 5.0x - or if there was a significant debt-financed acquisition.

Meanwhile S&P said Tenet's business profile was "weak" and that its debt leverage in the high-4x area is consistent with its "aggressive" financial risk profile. It rates Tenet at B with a stable outlook.

This morning, there has not yet been any reaction from the ratings agencies regarding the acquisition.

Vanguard's 7.75s due February 2019 are up about half of point to USD104.50 from Friday's close.

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