Community Health's Hostile Takeover Attempt Shatters Holiday Calm

Philip Betbeze, December 31, 2010

If you were out Christmas shopping the week before the big day, you might've easily missed the latest salvo in a fight that doesn't come to healthcare too often. Of course I'm referring to the increasingly hostile attempt by Community Health Systems, based just down the road from where I write in Franklin, TN, to take over previously troubled but now well-rehabbed Tenet Healthcare Corp., headquartered in Dallas.

This thing's a shooting war now, and there's a lot of money at stake as the two for-profit hospital chains battle for market share.

Community went public with its bid to acquire Tenet on Dec. 10, a move that proved an immediate shock to the market. Community has consistently worked under the radar nationally. It usually acquires hospitals in the ones, twos and threes, although it has been known to do a large deal or two over the years—Triad comes to mind. It also generally makes acquisitions in markets it can dominate—the markets it covets are usually rural, but not rural enough to be critical access. The markets they're interested in are also usually growing. But if this $3.3 billion acquisition were to go through, they'll get those markets, but also others in big cities and in declining population markets. However, there is precedent for how Community would divest some of those Tenet hospitals. It did the same when it digested Triad a few years back.

It would be no small acquisition. The proposed deal, which Tenet management wholeheartedly advises against, sent Tenet shares up 55% on the first day after it was announced. Giving credence to Tenet management's contention that the deal significantly undervalues the company, Community's shares rose more than 13% that same day. Further, the deal would make Community the nation's largest hospital operator in terms of number of hospitals. The combined Tenet/Community would have 176 hospitals to HCA's 150.

Make no mistake. Tenet's attractive. It's recovered nicely since a Medicare scandal in the early part of the decade, and its much publicized poor handling of the situation at its hospitals in New Orleans following the Hurricane Katrina disaster.

Outside of public relations, Tenet's CEO, Trevor Fetter, has Tenet humming. It's about to turn free-cash-flow positive for the first time in a long time, and has made huge progress in cost cutting and quality.

Remember, the company's current board has already said "no thanks" to Community. It was revealed after the public announcement that the two companies had at least had private conversations about an acquisition as far back as Nov. 12, but obviously did not make any progress, as Community decided to let the market weigh in by publicly announcing the bid at the original price it offered to Tenet a month prior. It was the first step in a hostile takeover bid.

Here's the next step. We don't know how many shares of Tenet Community has been able to buy on the open market prior to now, but they intend to use them to try to nominate friendly people to Tenet's board at the company's next annual meeting. They'll encourage other large shareholders who hold Tenet shares to vote for those folks too in the hopes that they'll get the votes necessary.

Philip Betbeze

Philip Betbeze is the senior leadership editor at HealthLeaders Media.

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