Hospital operator, Tenet Healthcare Corp, will buy smaller rival Vanguard Health Systems, for about $1.73bn plus the assumption of debt to expand into new geographies, further evidence of consolidation being driven by United States President Barack Obama’s healthcare reforms.
Reuters reports United States hospital stocks have rallied this year as investors expect the companies to benefit as more Americans are covered by health insurance and hospitals lose less money treating the uninsured.
The offer of $21 per share, a premium of 70 per cent to Vanguard’s Friday close, represents the highest price for the stock since the company’s initial public offering in 2011.
Vanguard, founded in 1997, was taken private by a group led by the Blackstone Group in 2004 and the private equity firm is still the largest shareholder with a 38 percent stake. Founder and CEO Charlie Martin holds 4.18 per cent.
Vanguard shares were trading at $20.73 before the bell while the deal includes the assumption of $2.54bn of debt.
“It’s a very smart deal for (Tenet) to be doing at this juncture and I think gaining the services of both Keith Pitts and Charlie Martin … is crucial to this,” said CRT Capital Group analyst Sheryl Skolnick, who has a “buy” rating on both companies. Pitts is the company’s vice chairman.
Analysts said the premium paid by Tenet was reasonable, given the potential savings from the deal. Tenet said it expects the deal to add to earnings in the first year and estimates annual savings of $100m to $200m.
Tenet shares, which closed at $41.85 Friday, were trading up six per cent in trading before the bell on the New York Stock Exchange on Monday.
“This acquisition will take Tenet into new geographic markets, expand the breadth of our service offerings, diversify our earnings sources and increase the benefits we expect to realize under healthcare reform,” Tenet CEO Trevor Fetter said in a statement.
Tenet operates 49 hospitals and 122 free-standing outpatient centers hospitals in California, Texas, Pennsylvania and several states in the U.S. Southeast.
Vanguard owns and operates 28 acute care and specialty hospitals in the US Midwest, South and Massachusetts.
Gibson Dunn & Crutcher was Tenet’s legal counsel and Lazard, Bank of America Merrill Lynch, Barclays and Teneo Capital were financial and strategic advisers.
Vanguard was advised by J.P. Morgan. Skadden, Arps, Slate, Meagher & Flom was legal counsel.
Tenet has secured fully committed financing from Bank of America Merrill Lynch for the deal that is expected to close by the end of the year.