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
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
"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
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.