Community Health on Tenet Board - Analyst Blog

In an attempt to press forward the take over bid, Community Health Systems Inc. (CYH) plans to nominate directors on the board of Tenet Healthcare Corporation (THC) at the 2011 annual meeting.

Tenet's board has agreed for re-election, though Community Health has not decided upon the number of directors who would join Tenet's board.

Community Health had proposed an offer to Tenet on December 9, according to which Community Health will offer to acquire all the outstanding shares of Tenet for $6.00 per share, including $5 a share in cash and $1 per share in its common stock. The offer is also a premium of 40% over Tenet's closing price of December 9.

Further, the deal was valued at $7.3 billion and Community Health stated that it will make an equity offer of $3.3 billion and would take about $4 billion of debt to finance the acquisition.

This was the second attempt for Community Health to bid for Tenet. Earlier on November 12, Community Health made an identical offer but Tenet's board rejected the same as the price offered by Community Health was inadequate, owing to weak industry stock valuations; and was not in favor of Tenet's shareholders.

Moreover, 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.

In addition, 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 to buy Tenet despite rejections, and believes in its strong management ability and skill to manage the hospitals.

It is also likely that there will be other potential buyers for Tenet and if the company is sold, the price would range around $7.25 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.

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 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.

 
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