Tenet Healthcare has rejected an unsolicited $3.3 billion dollar stock and cash buyout offer from Community Health Systems, saying the offer was opportunistic, undervalued the Dallas-based healthcare network and didn't adequately reflect the company's prospect for future growth.
CHS is the largest publicly traded hospital company in the country. It operates 126 hospitals in 29 states and has annual operating revenue of $12.7 billion. If it can work out a deal for Tenet, it will add 50 hospitals and an additional $9.2 billion annually to its top line.
Tenet had rejected an offer from CHS in early November. The most recent offer "is identical in all material respects to a Community Health proposal received by Tenet on Nov. 12, 2010," the company noted in a press release announcing the bid.
News of the buyout bid sent Tenet's stock soaring in early trading Friday on the New York Stock Exchange to $6.49 – an increase of more than 50 percent and significantly higher than CHS' offer of $6 per share.
On Wednesday, Tenet President and CEO Trevor Fetter and Board Chairman Edward A. Kangas sent a letter to Wayne Smith, president, CEO and board chairman of CHS, providing the reasons for rejecting the offer, which at the time represented a 40 premium over Tenet's stock price.
"The Tenet Board of Directors thoroughly reviewed and considered Community Health's unsolicited $6 per share cash and stock proposal with its financial and legal advisors and unanimously determined that Community Health's proposal would transfer the growth potential inherent in Tenet to Community Health without adequately compensating Tenet shareholders," the letter stated. "Our board believes that the interests of Tenet shareholders would be better served by benefiting from 100 percent of the upside inherent in Tenet rather than accepting Community Health's inadequate proposal. In addition, our board has serious concerns about Community Health's ability to integrate and operate a business like Tenet."
The letter prompted CHS to go public with its bid in an attempt to garner Tenet shareholder support for the attempted takeover. In a reply to Tenet, CHS noted it was "surprised and disappointed by your flat rejection of a transaction."
By going public with its bid, CHS is taking a risk in attracting other suitors to the table.
"Six dollars a share may get a deal done due to the stock component in the offer, but it remains to be seen if Community is the only bidder because Tenet is now in play," said Sheryl Skolnick, an analyst at CRT Capital Group in Stamford, Conn., in an interview with Bloomberg.
In a Friday morning conference call, Smith refuted the idea that CHS might have difficulty in integrating Tenet, citing the success of its $6.8 billion acquisition of Triad Hospitals in 2007.
"As with the Triad acquisition the combined company would have a significant scale advantage, primarily the ability to leverage operating efficiencies and the use of best practices across the entire hospital portfolio," said Smith. "Over the 10 years that we have been public our management team has a proven track record of unmatched operting performance and we continued to demonstrate this operating strength when we acquired the Triad assets in 2007 and successfully integrated those facilities."
From Tenet's standpoint, the integration of the two companies would be difficult due to the specific operating models of the companies. Tenet tends to run larger hospitals, while CHS has focused on smaller, community-based facilities.
"For years, you have extolled the virtues of being a sole community provider. According to industry analysts, approximately 65 percent of Community Health's hospitals and 85 percent of revenues come from hospitals that are sole community providers or where they compete with only one other hospital," noted Tenet in its letter to Smith. "That is a very different business model than Tenet's. You operate small hospitals; we operate large hospitals. Fewer than one-sixth of your hospitals are as large as our average hospital. You operate in rural or suburban markets; we operate primarily in urban markets. We operate four academic medical centers; you operate none. For these reasons, and more, it is not clear to us that your methods and strategies would create synergies across such disparate portfolios."
Tenet's reservations go beyond integration concerns. It also cited CHS' large debt load – one that Tenet maintains it the highest debt-to-earnings ratio in the industry. Further, Tenet believes CHS' stock is currently overvalued and, as such, doesn't represent a compelling currency for Tenet stockholders.