Tenet Healthcare Corp.'s (THC) $1.73 billion agreement to
acquire Vanguard Health Systems Inc. (VHS) will forge a far-larger
hospital operator as the industry is poised for major changes tied
to the health-care overhaul.
Dallas-based Tenet said it will expand to 79 hospitals from 49,
and significantly increase its geographic reach, adding markets
such as Detroit and Chicago and particularly deepening its presence
in Texas. Tenet also said the acquisition marks what it hopes will
be a stepped-up effort to acquire other hospitals, where its deal
pace has been relatively slow.
The hospital sector could see significant benefits from the
health overhaul, but there are also some potential downsides. More
people are expected to gain health coverage, and thus be able to
pay for their care. This could be a particular boon in some of
Vanguard and Tenet's hospitals in regions with many uninsured
people, said Sheryl Skolnick, an analyst with CRT Capital Group
LLC. Still, hospitals face some cutbacks in government payments,
some of which are set to ramp up in future years.
Hospitals also continue to face a slowdown in patient traffic
that has been seen as tied--at least partly--to the recession and
its aftermath. Tenet cautioned that inpatient volumes remain weak
in the current quarter.
Tenet Chief Executive Trevor Fetter said in an interview that
"there's a very compelling strategic rationale that would occur
without health reform," including annual synergies that Tenet
projects at $100 million to $200 million.
He said the projected savings included overhead reductions and
better management of supplies. Tenet's Conifer unit, which handles
billing and other revenue matters, could also improve certain
results at Vanguard hospitals, he suggested.
Tenet plans to pay $21 in cash for each Vanguard share, a 70%
premium to Friday's closing price. Including the assumption of $2.5
billion in Vanguard debt, Tenet said the deal is worth $4.3
billion.
Mr. Fetter also said the transaction focused on the combined
companies' strong Texas footprint because of the state's overall
growth, as well as the effects of the health overhaul there as some
uninsured people gain coverage through the law's new insurance
marketplaces.
Though the state's government has so far declined to accept the
health law's expansion of Medicaid coverage, leaving one new source
of hospital revenue likely unavailable, Mr. Fetter said he has
"confidence" the expansion of the health-benefit program for
low-income people will eventually take place in Texas.
Tenet said it expected to close the deal by the end of 2013.
Analysts said the lack of meaningful overlap between the two
companies' markets meant there were likely to be few antitrust
objections.
Vanguard shares surged 67% Monday to $20.70, near the offer
price, while Tenet shares rose 4.5% to $43.73.
The deal for Vanguard may brighten the spotlight on another
hospital company, Health Management Associates Inc. (HMA), which
recently said it had hired advisers partly to help with "ongoing
consideration of strategic alternatives and opportunities
available" after Health Management's largest shareholder indicated
it might push for changes, including new board members, at the
company. A.J. Rice, an analyst at UBS, said the fact that Tenet's
shares also saw a runup may "be encouraging to a would-be bidder"
for Health Management.
A Health Management spokeswoman declined to comment.
Write to Anna Wilde Mathews at anna.mathews@wsj.com and Jon Kamp
at jon.kamp@dowjones.com
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