Community to put Directors in Tenet - Analyst Blog

With the intention to grab Tenet Healthcare Corporation (THC), Community Health Systems Inc (CYH) plans to nominate directors to Tenet's board at its annual meeting.

Community Health has notified that it will designate 10 of its own nominees, plus four alternates to Tenet's board, which is scheduled for re-election at its annual meeting on November 3, 2011.

Community Health has nominated the following 10 directors:

• Thomas M. Bourdreau, a former senior executive at Express Scripts, Inc. (ESRX)
• Duke K. Bristow, an economist at the University of Southern California's Marshall School of Business and a former executive at Eli Lilly (LLY)
• John E. Horbneak, an executive-in-residence at Trinity University's department of healthcare administration
• Curtis S. Lane, a senior managing director at the boutique investment bank MTS Health Partners
• Douglas E. Linton, a consultant
• Peter H. Rothschild, an executive at Daroth Capital
• John A. Sedor, the chief executive of CPEX Pharmaceuticals
• Steven J. Shulman, an operating partner at Water Street Healthcare Partners and Tower Three Partners
• Daniel S. Van Riper, a financial consultant and former executive at Sealed Air
• David J. Wenstrup, an adviser with the Clinton Climate Initiative and a former executive at Warburg Pincus

The alternate nominees are James Egan, Jon Rotenstreich, Gary Stein and Larry Yost.

Community Health seeks to replace Tenet's board after strong rejections from Tenet. Moreover, Tenet is working hard to thwart the hostile takeover bid of Community Health by adopting a poison pill strategy against the takeover.

Community Health proposed the offer of acquisition to Tenet on December 9 to acquire all of the outstanding shares for $6.00 per share, including $5 a share in cash and $1 per share of its common stock.

This was the second attempt of Community Health. Earlier on November 12, Community Health made an identical offer but Tenet's board rejected it.

In addition, Tenet had doubts whether Community Health will be able to manage and integrate the operations of its businesses, as Tenet believes that Community Health is incapable of meeting its own 2011 guidance given slowing growth.

Tenet also used a poison pill strategy in the form of a Section 382 Rights Agreement to make its stock less attractive to Community Health. Under the measure, in case of any change in ownership, i.e. if any person or firm buys more than 4.9% of Tenet's stock, shareholders who own less than 4.9% of the company's stock will get the right to buy one additional share for every share they own. This will take effect on January 17.

Community Health believes that the value offered to Tenet is fair and is therefore not in favor of raising it higher. On the other hand, Tenet seems unsure as to whether it should go for a repurchase of shares or add a dividend to increase the company's value. Tenet also expects other interested buyers to make attractive offers before the 2011 annual meeting.

Further, Barclays Capital, a unit of Barclays PLC (BCS), will act as the financial advisor to Tenet. Gibson, Dunn & Crutcher LLP and Debevoise & Plimpton LLP will be the legal counsel of Tenet. On the other hand, Credit Suisse (CS), the law firm Kirkland & Ellis and the proxy solicitor D.F. King will be the legal advisors to Community Health.

If Community Health wins Tenet, it will 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 synergies and other benefits, and would add to earnings in the full year of 2010. However, Tenet would lose tax assets' benefits if it undergoes an ownership change.

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%.

One of the reasons for such acquisitions is that hospital operators are frantically trying to contain costs and bad debts, as their operations have been 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.

 
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