Tenet rejects CHS buyout offer, shares skyrocket

Following Tenet Healthcare's (NYSE: THC) rise in stock prices this morning--from $2.22 per share to $6.51 per share--two days after rejecting Community Health System's (NYSE: CYH) $7.3 billion takeover bid, there is a growing sense that an even bigger offer could be made for the much maligned Dallas-based corporation, the Associated Press reports. 

Tenet turned down the CHS offer, which included roughly $4 billion in assumed debt, with Tenet CEO Trevor Fetter calling it "opportunistic" in a letter to CHS CEO Wayne Smith. Had Tenet accepted the deal, the combined health entity would have been the largest for-profit hospital system in the nation in terms of number of hospitals (176); Tenet would have brought 49 acute-care hospitals in 11 states and 59 outpatient service centers to the table, as cited by Reuters. Nashville-based Hospital Corporation of America, currently the nation's largest chain, has 150 hospitals. 

"Our Board believes that the interests of Tenet shareholders would be better served by benefiting from 100 percent of the upside inherent in Tenet rather than accepting Community Health's inadequate proposal," Fetter wrote. "In addition, our Board has serious concerns about Community Health's ability to integrate and operate a business like Tenet." 

What's more, Fetter called CHS's stock "over-valued" and undesirable. "Community Health's same-hospital admissions have declined year-over-year every quarter for the past two years, and its same-hospital [Earnings Before Interest, Taxes, Depreciation and Amortization] margin has essentially been flat since late 2008," he continued. "As such, it is difficult to understand how Community Health can meet its 2011 earnings guidance."

Financial analyst Sam Goodyear, of CreditSights, told DealBook that he didn't agree with Tenet's actions, especially considering Tenet's sell-off of shares shortly after the passage of the new healthcare law last March. This year, CHS shares have fallen 11 percent, but Tenet's shares have dipped 20 percent. 

"[I]t will be extremely difficult for the company to convince shareholders that it should reject Community's offer outright," he said. 

Analyst Jason Gurda of Leerink Swann, according to a research note cited by Reuters, thinks that should CHS raise its offer to $7 per share, Tenet likely would bite. "We believe Community Health would most likely be willing to raise its offer, and that frustrated Tenet shareholders are likely to accept a deal," he said. 

For more information:
- here's the Associated Press article
- read Fetter's letter to Smith (.pdf)
- here's the DealBook piece
- check out article 1 and article 2 from Reuters