Community Health May Up Tenet Bid - Analyst Blog

In order to get hold of Tenet Healthcare Corporation (THC), Community Health Systems Inc. (CYH) may push the bid higher to keep away other potential bidders for Tenet.

Community Health initially approached Tenet in the form of a letter on November 12, but was rejected. However, Community Health again followed up on December 9, with an identical offer as before.

According to the acquisition deal, Community Health has offered to acquire all the outstanding shares of Tenet for $6.00 per share, including $5 a share in cash and $1 per share of its common stock. This offer also provided 40% premium over Tenet's closing price of December 9.

Further, the deal was valued at $7.3 billion and Community Health was to make an equity offer of $3.3 billion and obtain about $4 billion of debt to finance the acquisition deal.

However, Tenet had doubts whether Community Health will be able to manage and integrate the operations of a business like Tenet. Moreover, Tenet believes that Community Health is incapable of meeting its own 2011 guidance given slowing growth.

Tenet's board also agreed that the deal is not in the best interests of the shareholders, and that Community Health would transfer the growth potential inherent in Tenet to Community Health without adequately compensating Tenet's shareholders.

Moreover, the hospitals of Tenet and Community Health overlap in 10 states, most notably in Texas, where Community Health has 18 hospitals and Tenet has 10. The only state where Tenet has its presence and Community Health does not is Nebraska.

But Community Health is determined enough to buy Tenet despite rejections, and believes in its strong management ability and skill to manage the hospitals.

Further, the hospital operators are also frantically trying to contain costs and bad debts, as their operations have been badly hit by high unemployment levels and a weak economy. In addition, speculation over the delays in healthcare reform and its impact has triggered the acquisition growth in the sector.

According to analysts, there have been 315 acquisitions in the U.S. hospital industry in the past five years with an average purchase price of $589 million and an average premium of 8%.

Therefore, it is most likely that there will be other potential buyers for Tenet and if the company is sold, the price would range around $7.25 per share to $8.25 per share.

If Community Health bags Tenet, it is expected to create the second largest hospital chain in the U.S. generating $22 billion in annual revenue, with 176 hospitals operating in 30 U.S. states. Moreover, the deal would bring cost savings and other benefits, and would add to earnings in the full year of 2010.

 
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