Tenet successfully fends off CHS’s hostile takeover bid
DALLAS – In a year marked by a projected 20 percent increase in healthcare mergers and acquisitions, perhaps one of the biggest M&A stories was one that didn’t happen: Community Health Systems’ hostile bid to acquire Tenet Healthcare.
After pressing for a deal for more than five months, CHS finally abandoned its attempt to acquire Tenet in early May amid a government probe of its admissions practices that were alleged in a Tenet lawsuit against CHS.
Tennessee-based CHS’ interest in Tenet first came to light in early December last year, when the Tenet board of directors announced it had rejected an unsolicited $3.8 billion dollar bid for the company.
According to Tenet, while the $6 per share cash and stock offer represented a 40 percent premium over Tenet’s per share value at the time, the offer was opportunistic, undervalued the Dallas-based healthcare network and didn’t adequately reflect the company’s prospects for future growth.
“It is unfortunate that Tenet's board of directors has rejected our proposal and refused to sit down with us to discuss our premium offer,” said Wayne T. Smith, chairman, president and CEO of CHS at the time. “We believe Tenet shareholders would be best served by a board focused on maximizing shareholder value, and we intend to propose directors who will look out for the interests of Tenet shareholders.”
Tenet responded by scheduling its annual meeting, usually held in May, for November and adopting a ‘poison pill’ shareholder rights amendment to its bylaws aimed at preventing CHS from acquiring a critical mass of Tenet stock.
In the meantime, Tenet’s stock traded as high as 30 percent above the CHS offer and Wall Street analysts estimated it would take a revised offer of at least $8 to $9 per share to interest Tenet stockholders.
After a couple of months of no activity, Tenet emptied its quiver in an April lawsuit that alleged Community Health Systems systematically incorrectly admitted patients to its hospitals that other providers routinely classified for lower paying outpatient “observation” status. The result, according to Tenet, was overbilling of Medicare and likely other payers, which resulted in unsustainably inflated revenue and an overvaluation of CHS stock – a key financial component of the CHS offer.
“We are seeking to provide Tenet stockholders with the information they need to make an informed decision by asking the court to compel Community Health to correct its false and misleading statements and omissions,” noted Tenet in a statement related to the lawsuit.
Shortly thereafter CHS announced that the U.S. Justice Department was widening its probe of CHS’ billing practices, and also disclosed an ongoing, 22-month-old whistleblower lawsuit in Texas over outpatient billing practices, that previously had been under seal.
While CHS presented a detailed defense of its billing practices in an hour-long April conference call with investors and the press, its bid for Tenet hung by a thread in the face of an increasing federal probe.
In a last-ditch effort to save the deal, and likely to save face, CHS made a final, take-it-or-leave-it offer in late April of $7.25 per share of Tenet stock, which Tenet’s board summarily rejected.