December 10, 2010 / 3:55 PM / 7 years ago

UPDATE 3-Community Health may need to lift bid to win Tenet

5 Min Read

* Tenet shares rise above $6/share bid

* Other bidders may step in -- analyst

* Community Health shares rise almost 14 pct (Adds background on companies, deal, updates share movement)

By Lewis Krauskopf

NEW YORK, Dec 10 (Reuters) - Tenet Healthcare Inc (THC.N) shares jumped more than 55 percent on Friday, surpassing the $6-per-share bid from Community Health Systems Inc (CYH.N) and likely forcing the potential buyer to raise its offer for the rival hospital company.

Community Health, which said the combined entity would operate more hospitals than any other company, also might have to ward off other bidders for Tenet.

After Community went public with its unsolicited $3.3 billion bid late on Thursday, Tenet rejected its larger rival's offer as "opportunistic" and "inadequate." [ID:nN09268560]

Tenet shares jumped 54.5 percent to $6.63 in Friday afternoon trading on the New York Stock Exchange.

Other hospital companies, either publicly traded or privately held, are likely to be interested in Tenet, as might health insurers and private equity firms, which have invested in the hospital sector in the past, said CRT Capital Group analyst Sheryl Skolnick.

"I think it is highly likely that there will be additional interest in this company, and if the company is sold it won't be for $6 a share in cash and stock to Community," Skolnick said.

Skolnick said a fairer price would be around $7.25 per share to $8.25 per share.

(For a Breakingviews column see [ID:nN10108118])

Community shares also rose, by 13.7 percent to $35.97, as analysts said a deal would bring cost savings and other benefits. The company said the deal, which it valued at about $7.3 billion including debt, would add to earnings in its first full year.

The offer represented a 40 percent premium to Tenet shares, based on Thursday's closing price.

The stalled U.S. economy has hit hospital companies, as patients try to save money by using fewer healthcare services.

"Valuations in the hospital industry are near historic lows," Susquehanna Financial Group analyst A.J. Rice said. "Community Health management ... has identified that it sees an opportunity to acquire (Tenet) at an attractive price."

Leerink Swann analyst Jason Gurda said that even at a price of $7 per share, the acquisition would still add slightly to Community's earnings.

"We believe Community Health would most likely be willing to raise its offer and that frustrated Tenet shareholders are likely to accept a deal," Gurda said in a research note.

In a conference call with analysts on Friday, Community Health Chief Executive Officer Wayne Smith said the company hoped that Tenet could be drawn to the negotiating table.

"We're absolutely committed," Smith said. "We think this is strategically important to us."

According to Community, the combination would create the largest hospital company in terms of number of hospitals, at 176. At nearly $22 billion in revenue, it would trail HCA Inc, which has $30.5 billion in annual revenue, Community said.

HCA, which is backed by buyout firms Bain Capital and Kohlberg Kravis Roberts & Co (KKR.N), filed in May for an initial public offering of as much as $4.6 billion.

Community's bid amounted to about six times 2011 earnings before interest, taxes, depreciation and amortization, well below the multiples of 7.8 for the leveraged buyout of HCA and 8.4 for what Community paid for Triad Hospitals, according to Oppenheimer & Co analyst Michael Wiederhorn.

Shares of Dallas-based Tenet traded above $50 earlier in the decade but declined after a series of financial and other setbacks.

They had been above $6 as recently as May. However, they came under pressure this summer when it came to light that the company was in talks to buy Australian hospital company Healthscope Ltd. Tenet later said it had pulled out of those discussions, and private equity firms TPG [TPG.UL] and Carlyle [CYL.UL] won Healthscope for $1.73 billion.

The shares did not recover, and Tenet's third-quarter results in November also disappointed.

Raymond James analyst John Ransom said he had maintained that Tenet stock could rise as high as $12 in the next two years, provided the company achieved its growth plans, paid off debt and returned to an industry-level trading multiple.

On Thursday, Tenet called Community's proposal "opportunistic" and said it "would transfer the growth potential inherent in Tenet to Community Health without adequately compensating Tenet shareholders."

"Management of Tenet has sent the signal that says: 'We have been an underappreciated asset ... We're correcting that,'" CRT's Skolnick said. (Reporting by Lewis Krauskopf and Ransdell Pierson; Editing by Derek Caney and Gerald E. McCormick)

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