Tenet Gulps Down Poison Pill - Analyst Blog

To discourage the hostile takeover bid from Community Health Systems Inc (CYH), Tenet Healthcare Corporation (THC) has adopted a shareholder rights plan, known as poison pill; and scheduled its annual meeting for November.

Community Health had proposed an offer to Tenet on December 9, according to which Community Health will offer to acquire all of 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 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, which was not in favor of Tenet's shareholders.

To further pressurize Tenet, Community Health planned to nominate a slate of directors for Tenet's board at its annual meeting.

However, 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.

Therefore, Tenet used 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.

This measure would thus lead to dilution of the shares held by the acquirer, making the takeover attempt more difficult and expensive. Moreover, this will protect Tenet's ability to utilize its net operating loss carry-forwards, which total approximately $2 billion, as the Section 382 could substantially limit the use of net operating losses and other tax assets, in case of change in ownership.

In addition, Tenet's board of directors has announced its 2011 Annual Meeting of Stockholders on November 3, 2011. Further, Barclays Capital, a unit of Barclays PLC (BCS), will act as the financial advisor to Tenet. Moreover, Gibson, Dunn & Crutcher LLP and Debevoise & Plimpton LLP will be the legal counsel of Tenet.

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. However, Tenet would lose those net operating losses and other tax assets' benefits if it faces 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 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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