Analysts criticize bid For Tenet Healthcare

Analysts say Community Health Systems Inc.’s $3 billion bid for fellow hospital operator Tenet Healthcare Corp. deal doesn’t reflect Tenet’s value but may spark a bidding war that draws private equity interest.

Community Health, the Tennessee corporation that locally owns Deaconess Medical Center and Valley Hospital and Medical Center, on Thursday took its offer of $6 per share for the Dallas-based company public to rally shareholder support after Tenet’s board rejected a possible deal. The offer involves $5 in cash and $1 in stock per share and marks a 40 percent premium to Tenet’s prior closing price. Including assumed debt, the company values the deal at about $7.3 billion.

But Tenet called the price inadequate and said its board has serious concerns about Community Health’s ability to integrate and operate a business like Tenet and meet its own 2011 guidance, given slowing growth. Tenet executives told their Community Health counterparts in a sharply worded letter that they are concerned about Community Health’s debt levels and believe a tie-up would further weaken its balance sheet.

“Our (board) does not believe it is in our shareholders’ interests to receive stock in a company with excessive leverage and a risky capital structure,” Tenet President and CEO Trevor Fetter and Chairman Edward A. Kangas said in the letter.

Some analysts agreed. Raymond James analyst John W. Ransom downgraded Community Health’s stock to “Market Perform” citing the company’s “already stretched balance sheet.”

And in terms of price, the Community Health bid appears to be “grossly undervalued,” Caris & Co. analyst Ann Hynes wrote in a research note. But she sees the offer as a positive for Tenet because it might spur a private equity bid for the company.

Jason Gurda, an analyst with Leerink Swann, said he sees hospital operator Health Management Associates Inc. as the only other realistic bidder. But he thinks Community Health may raise its bid after all and frustrated shareholders would likely accept a deal.

CRT Capital analyst Sheryl R. Skolnick also deemed Community Health’s offer “wholly inadequate and insufficient.” She said Tenet might fetch up to $8.25 per share in an all-stock deal, or as much as $9.50 per share for an all-cash acquisition. That would total as much as $4.6 billion.

Investors appear to think a higher price is in the offing – Tenet shares surged 55 percent, or $2.36, to close at $6.65 on Friday. Community Health shares rose more than 13 percent to finish at $35.89. The news also lifted shares of industry peers, with Lifepoint Hospitals Inc. up 5 percent to $37.40 and HMA closing up 4.3 percent to $9.53.

The deal would create the nation’s second-largest hospital chain, with 176 hospitals across 30 states and annual revenue of about $22 billion.

Franklin, Tenn.-based Community Health has been buying up smaller operations, such as a South Carolina health care system last summer, since its $5.1 billion purchase of Triad Hospitals Inc. in 2007.