Community Health may need to raise bid to win Tenet

NEW YORK (Reuters) - Tenet Healthcare Inc THC.N shares jumped more than 54 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 also may have to ward off other bidders, analysts said, after it went public with its unsolicited $3.3 billion bid late on Thursday. Tenet rejected its larger rival’s offer as “opportunistic” and “inadequate.”

Tenet shares jumped 54.3 percent to $6.62 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 more fair price would be around $7.25 to $8.25 per share.

Community shares also rose, by 16.5 percent to $36.87, 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.

“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, 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.

Tenet shares came under pressure earlier this year 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 average price target for Tenet shares among 15 analysts who cover the company is $6.30, according to Thomson Reuters data.

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 achieves its growth plans, pays off debt and returns 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 Lisa Von Ahn