Recently, Tenet Healthcare Corporation THC signed a few deals to enhance its operations. However, the news of these agreements failed to drive share price owing to broader market dynamics.
Tenet-USPI JV
The first definitive agreement that the company has entered into was with private equity firm Welsh, Carson, Anderson & Stowe. Per this transaction, Tenet and United Surgical Partners International (“USPI”) will merge their short-stay surgery and imaging center assets to form a joint venture.
USPI is a unit of Welsh, Carson, Anderson & Stowe and is one of the leaders in ambulatory surgery and short-stay medicine industry. The deal is pending regulatory approvals and is expected to close by the third quarter of 2015.
Terms of the Deal
Tenet Healthcare will contribute 44 freestanding ambulatory surgery centers and 20 imaging centers while Welsh Carson will provide USPI’s 202 ambulatory surgery centers and 16 surgical hospitals. On the payment front, Tenet will shell out $425 million in cash to Welsh Carson and the other existing shareholders of USPI against their contributed assets.
On culmination, Tenet will become the 50.1% stakeholder of the JV while Welsh Carson and USPI shareholders will hold an interest of 49.9%. However, over the next five years Tenet will be able to have a 100% stake in USPI through put/call structure.
The enterprise value of the JV translates into approximately 12.5x forward EBITDA less the Non-Controlling interest (NCI), based on an equity value of nearly $2.6 billion. The remaining ownership in USPI can be obtained by Tenet at a fixed multiple of 9.5x forward EBITDA less NCI.
Benefits
Combination of Tenet and USPI will form the largest ambulatory surgery services in the U.S. that will help both parties to cater to the growing demand for the same. The deal will allow the provision of high quality and consumer-friendly services at lower cost that will help in the long-term shift to value-based care.
This JV may have no effect on the 2015 EPS but is anticipated to boost the 2016 EPS. Moreover, the deal will help Tenet to enhance its growth and profitability consistently and improve cash flow.
Aspen Healthcare Acquisition
The second definitive agreement was also with Welsh Carson, per which Tenet will acquire Aspen Healthcare Ltd. that operates nine private hospitals and clinics in the U.K. Aspen was acquired by USPI in Apr 2000 with the help of Welsh Carson. The deal is expected to close in the third quarter of 2015.
Terms of the Deal
The cash consideration of the deal translates to $215 million. This deal is independent of the aforementioned JV and on closing Aspen will not become a part of the same.
Benefits
The demand for private healthcare services is growing steadily in the U.K., the main reasons being demographic changes, increased consumer healthcare spending and higher work opportunities with the National Health Service.
At this juncture, foraying into the U.K. healthcare market will help Tenet tap the opportunities and establish a strong revenue base in the nation. The acquisition of Aspen – a solid network of well-capitalized private hospitals and clinics – will enable Tenet to enter the U.K. market.
Funding
Tenet expects to issue $2.2 billion of debt. The net proceeds of the debt will be used to fund the above transactions and related expenses. The remaining will be used to refinance USPI’s $1.5 billion existing debt.
Partnership with Baylor Scott & White Health
The third deal was the partnership with Baylor Scott & White Health – the largest not-for-profit health care system in the State of Texas. Through the partnership, Tenet aims to provide integrated, value-based care to Dallas, Rockwall and Collin counties.
Per the definitive agreement, care will be provided to communities in the above-mentioned counties through five North Texas hospitals in which Tenet will have joint ownership with Baylor Scott & White Health. These five hospitals are Centennial Medical Center, Doctors Hospital, Lake Pointe Medical Center, Texas Regional Medical Center, and Baylor Medical Center. However, Baylor Scott & White Health will hold the majority stake in the five hospitals.
With 49 hospitals and more than 800 access points Baylor Scott & White Health is a prominent name in the Texas healthcare space. The organization shares the same goal as Tenet – providing enhanced health care to communities they serve. Thus it should complement Tenet’s capabilities and help it cater to more patients in an efficient manner.
Per the Deal
The partnership will be headed by a board of directors who will be jointly appointed by the companies. Tenet will be responsible for managing the operations of Centennial Medical Center, Doctors Hospital, Lake Pointe Medical Center and Texas Regional Medical Center. Baylor Scott & White Health, on the other hand, will manage Baylor Medical Center. However, there will be no change in the management teams for any hospital.
Zacks Rank
Tenet currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the healthcare space include MEDNAX, Inc. MD, VCA Inc. WOOF and Addus HomeCare Corp. ADUS. All three stocks hold a Zacks Rank #2 (Buy).
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