After the third rejection by Tenet Healthcare Corporation (THC), its rival hospital operator Community Health Systems, Inc. (CYH) has finally withdrawn its $3.5 billion offer to acquire Tenet.
In addition, Community Health has pulled out its 10 nominees for Tenet’s board of directors for Tenet’s 2011 board meeting.
Tenet has rejected the revised proposal from Community Health on May 2 to acquire all of the outstanding shares of Tenet for $7.25 per share in cash. Tenet believes that the offer, which was increased by 21%, still undervalues the company.
Earlier on November 12, 2010, Community Health had proposed a bid to purchase all of Tenet’s outstanding shares for $6.00 per share, including $5 a share in cash and $1 per share. However, Tenet’s board rejected the same as the price offered by Community Health was inadequate, owing to weak industry stock valuations, which was not in favor of Tenet’s shareholders.
Community Health showed up again on December 9 with an identical offer of $6.00 per share, but Tenet had turned down the deal.
The reason for rejection by Tenet was the doubt whether Community Health will be able to manage and integrate the operations of its businesses, as Tenet believes that Community Health is incapable of meeting its own 2011 guidance given slowing growth.
Tenet even adopted a poison pill strategy against the takeover, but Community Health was determined to buy Tenet. To pressurize Tenet, Community Health also nominated 10 independent directors on January, 2011 to Tenet’s board.
Besides, Tenet has accused Community Health in a lawsuit of improperly admitting patients and over-billing its Medicare.
According to the lawsuit by Tenet, Community Health has been artificially enhancing its performance over the years by showing more payments from Medicare. Further, Tenet accused that Community Health has increased its in-patient admissions by admitting thousands of patients into hospitals that should only be kept for outpatient observation, which is less expensive.
Tenet estimates improper Medicare billings of between $280 million and $377 million over three years, beginning in 2006, for as many as 82,000 patients.
Though Community Health rejected all the accusations, the lawsuit states that if found guilty, Community Health would be liable to pay well over $1 billion for its practices during the 2006-2009 period. Further, the company could face investigations from Medicaid and private insurers, in addition to Medicare.
Tenet has reported solid first-quarter operating earnings of $82 million or 16 cents per share on May 3, ahead of the Zacks Consensus Estimate of 14 cents per share. Net operating income in the prior-year quarter was $83 million or 16 cents per share.
The improved results were due to robust performance in all lines of the business, especially in outpatient volumes, which contributed significantly to the growth. The increase in both paying admissions and total admissions also turned positive in the quarter.
Besides, on May 9, Tenet's board authorized the repurchase of up to $400 million of Tenet common stock, which will be repurchased at regular intervals and amounts based on market conditions and other factors.
We continue to believe that after rejecting Community Health’s bid, Tenet will be able to better execute its current business strategy and deliver greater value than Community Health’s inadequate proposal.
In addition, we believe that volume growth can significantly help achieve future profitability, including growth through the acquisition of hospitals and other health care facilities. We also expect appropriate reimbursement levels and cost control across the portfolio of hospitals to facilitate better cost management and business operations.
Though Tenet has been focusing on cost efficiencies, controlling labor costs in a fluctuating patient volumes environment is a tough challenge for Tenet, as inflation and technology improvements drive supply costs higher, and the efforts to control supply costs through product standardization, bulk purchases and improved utilization become difficult.
Overall, we strongly believe that volume growth can significantly help boost the earnings outlook of Tenet and its labor cost management in future.
COMMNTY HLTH SY (CYH): Free Stock Analysis Report
Be the first to comment