Tenet Healthcare acquires Vanguard Health Systems

August 2013 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

On 24 June, Tenet Healthcare Corporation announced it had entered into a definitive agreement with Vanguard Health Systems to purchase the company in an all cash transaction.

Tenet will pay $21 per share to acquire Vanguard, a price which represents a 70 percent premium on Vanguard’s closing stock price on Friday 21 June, the last day of trading before the deal was agreed. Shares in Vanguard rose 67 percent to $20.70 on the morning the two companies announced the deal. The total value of the acquisition is $4.3bn, including the assumption of $2.5bn of Vanguard’s outstanding debt. In order to fund the deal, Tenet has secured fully committed financing from Bank of America Merrill Lynch.

The deal has been unanimously approved by the boards of both companies, although at the time of writing the acquisition is still subject to the usual closing conditions and regulatory approval. The two companies expect the deal to close before the end of 2013.

Once completed, Tenet anticipates the deal will add to its earnings in the first year and bring annual cost savings of between $100m and $200m. The newly merged company will be the second largest for-profit US hospital operator, with total revenues of about $15bn in 2012. Indeed, the newly combined company will be a powerhouse in the US healthcare sector. The deal will see the total number of hospitals under Tenet’s control expand to 79 nationwide, with 157 outpatient facilities.

Furthermore, Dallas-based Tenet will diversify its geographic footprint to 16 states, including two new markets in Texas. Tenet believes that states such as Texas should see a fast-rising base of customers in the wake of the full implementation of the Affordable Health Care Act – ‘Obamacare’ – in January 2014. The Affordable Health Care Act will see medical insurance extend over the next decade, eventually providing cover to some 27 million currently uninsured people. The Congressional Budget Office also estimates that an additional 8 million people will join Medicaid programs in 2014 because of the expansion, which raises the income eligibility limits.

Upon closing the deal, Charlie Martin, Vanguard’s founder, chairman and chief executive officer, will join Tenet’s board of directors. Additionally Keith Pitts, Vanguard’s vice chairman, will join Tenet’s senior management team, assuming the role of vice chairman. Mr Martin, in a statement announcing the deal, said, “This combination will establish a much larger, stronger, and flexible industry-leading healthcare organisation. The cultures of our two companies are a great fit and we share a vision of creating a better health and healthcare system that will lead us through the coming changes.”

The current period of consolidation in the for-profit hospital business will continue to be driven by the impending healthcare reforms, and many analysts believe it is extremely likely that acquisitions in the sector will continue.

In a statement, Trevor Fetter, president and chief executive of Tenet, noted “This unique strategic transaction will bring together organisations that share a common commitment to providing high quality care and create significant new growth prospects for Tenet. 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 realise under healthcare reform.”

As a result of the sale, private equity giant Blackstone stands to double its original investment in Vanguard. Blackstone, the company’s largest shareholder, with around a 37.9 percent stake, beat rival firms KKR and Thomas H Lee Partners to purchase a majority stake in Vanguard from Morgan Stanley Capital Partners for around $1.75bn in 2004.

Richard Summerfield