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DALLAS – After more than a month of corporate chess that saw Community Health Systems launch a $3.3 billion hostile takeover bid for hospital operator Tenet Healthcare, things have quieted down.
The final moves of round one saw CHS nominate, in early January, a full slate of directors to run against Tenet’s current directors at the company’s annual meeting. CHS is seeking directors sympathetic to their cause, who would then vote in favor of the acquisition.
In response, Tenet rescheduled its annual meeting from May to November in order to prove through its performance this year that CHS has undervalued the company. The company also adopted a shareholders’ rights provision, a so-called “poison pill,” intended to scare away suitors that might begin accumulating large blocks of Tenet stock.
“The strategy now for Tenet leading up to November is to execute, execute, execute,” said Sheryl Skolnik, senior vice president and analyst with the CRT Capital Group in Stamford, Conn. “The company now needs to show that it can deliver results, especially after the third quarter last year, which is a cyclically slow quarter for the company but was still disappointing.”
Before undertaking its hostile offer in early December, CHS management had approached Tenet in early November with an offer of $6 per share, which represented a premium of more than 40 percent over Tenet’s share price at the time. One month later, Tenet rejected the offer as inadequate.
"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,” said Tenet President and CEO Trevor Fetter and Board Chairman Edward A. Kangas in a letter to Wayne Smith, president, CEO and board chairman of CHS. “In addition, our board has serious concerns about Community Health’s ability to integrate and operate a business like Tenet.”
With the battle now public, Wall Street sensed opportunity, and Tenet shares rose to $6.65 on the announcement, well above the offer price. The company has traded in that range and higher since CHS made its hostile takeover move.
One reason Tenet may feel the CHS offer is inadequate, aside from its belief it will post better results in 2011, is the company’s $2 billion net operating loss (NOL) carry-forwards currently on the books, which can be used in incremental charges against earnings going forward.
“The $2 billion NOL represent a huge built-in tax benefit to the company and, among other things, we don’t think Community Health Systems valued that fairly in their offer,” said Rick Black, a spokesman for Tenet.
CHS has not commented specifically on the fact that the market has priced Tenet above its offer.
"Tenet shareholders should be deeply disappointed that their board's response to a compelling 40 percent premium offer is a double-barreled entrenchment strategy – facilitating a significant delay of their 2011 Annual Meeting and installing a poison pill,” the company stated. “Tenet should engage with us in good-faith discussions to complete a mutually beneficial transaction.”