Community Health offers to buy Tenet for $3B


FILE – In this May 6, 2008 file photo, Houston’s Park Plaza Hospital, one of the hospitals owned by Tenet Healthcare Corp. is shown. After being rejected by Tenet Healthcare Corp.’s board, hospital operator Community Health Systems Inc. is taking its $3 billion cash and stock offer for its smaller rival public in a move to rally shareholder support for the deal. (AP Photo/Pat Sullivan, File)

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FRANKLIN, Tenn. (AP) — After being rejected by Tenet Healthcare Corp.’s board, hospital operator Community Health Systems Inc. is taking its $3 billion cash and stock offer for its smaller rival public in a move to rally shareholder support for the deal.

Tenet shares surged nearly 50 percent in aftermarket trading on the news, rising $2.04 to $6.30.

The deal would create the nation’s second-largest hospital chain, with 176 hospitals across 30 states and annual revenue of about $22 billion. It would also help Community Health better compete with Nashville, Tenn.-based HCA Inc., which operates 163 hospitals and over 100 surgery centers in 20 states and Britain.

Community Health said Thursday it sent a letter to Tenet’s board last month offering $6 per share for the Dallas-based company, including $5 in cash and $1 in stock. That would represent a 40 percent premium to Tenet’s closing price Thursday of $4.29.

Including assumed debt, the company values the deal at about $7.3 billion. Based on Tenet’s 485.5 million shares outstanding on Nov. 2, the cash and stock portion would be worth $2.91 billion. Community Health said the cash portion would be funded with available cash on hand and debt financing.

But Franklin, Tenn.-based Community Health said Tenet Healthcare’s board rejected the offer on Monday, saying it does not offer “even remotely fair value” to shareholders.

In a letter Thursday to Tenet’s board, Community Health Chairman and CEO Wayne T. Smith said he is “surprised and disappointed” by the flat rejection and now wants Tenet shareholders to decide for themselves. Smith said the geographic proximity of the companies’ facilities makes the combination a good fit, and with the expanded scale and market reach that a merger would provide, the companies together would be well-positioned to navigate health care reform.

“It remains our strong desire to reach an agreement with Tenet,” Smith wrote. “However, we are committed to completing this transaction and will consider all alternatives necessary to do so.”

Tenet said that after reviewing Community Health’s offer with financial advisers, its board determined that the “inadequate proposal” wasn’t in the best interests of the company or shareholders. It said the board has serious concerns about Community Health’s ability to integrate and operate a business like Tenet and its ability to meet its own 2011 guidance given slowing growth.

“It is clear to us that your standalone prospects have slowed and you are pursuing an acquisition of Tenet to drive the growth you cannot achieve on your own,” President and CEO Trevor Fetter and Chairman Edward A. Kangas wrote in a Dec. 8 letter to Smith that was released late Thursday.

Tenet shares traded in April at a 52-week high of $6.46, a sharp recovery from their plunge during the market meltdown in 2008 and early 2009 which brought the stock below $1. The stock rose as high as $50 back in the early part of the decade, but hasn’t traded in the double-digits since 2005. Tenet noted that valuations in the hospital industry are near 10-year lows, and said its stock price doesn’t reflect its growth potential coming out of the downturn.

Tenet Healthcare, which operates about 50 hospitals, last month reported a return to third-quarter profit as it booked hefty deferred tax benefits. Revenue remained flat at $2.26 billion. Community Health, which operates more than 120 hospitals, in October reported quarterly earnings of $70.4 million on revenue of $3.25 billion.

Avondale Partners analyst Kemp Dolliver said the deal would further diversify the areas in which Community Health operates. He said Community Health’s management has a good track record at integrating acquisitions to improve both companies’ operations.

But he thinks any Tenet suitor, whether Community Health wins out or not, will have to ante up a higher price to get a deal done.

In aftermarket trading, Community Health shares fell $1.39, or 4.4 percent, to $30.25.

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