As Tenet Healthcare Corp. and OrNda HealthCorp last week announced a proposed $3.1 billion merger, many hospital executives undoubtedly entertained visions of a new and rival suitor to Columbia/HCA Healthcare Corp.
It was a dream that Tenet Chairman and Chief Executive Officer Jeffrey Barbakow appeared eager to promote. He implicitly set up his company as the community-oriented, for-profit alternative to a monolithic Columbia, the gobbler of hospitals.
"As those not-for-profit hospitals consider their futures, we know they would like to have more options," Barbakow told industry investment analysts. "A lot of them will be attracted to our community-based approaches."
Barbakow made the statement during a telephone conference explaining the deal to analysts. Under terms of the transaction, Santa Barbara, Calif.-based Tenet would acquire OrNda, headquartered in Nashville, Tenn., in a $1.8 billion stock swap and assume $1.3 billion of OrNda's debt. The deal would add OrNda's 50 hospitals to the 76 operated by Tenet, already the nation's second-largest hospital chain behind Columbia.
The combined company would generate about $8.5 billion in annual revenues and operate 126 hospitals in 22 states. Tenet would have a formidable presence in the West, Southwest and Southeast. But based on revenues it would still be less than half the size of Columbia.
For that reason and others, the deal drew mixed reviews from analysts.
"OrNda is a house of cards. Tenet is buying properties that are a piece of crap, that are going to take a lot of skill to be able to operate effectively, if they can be operated well at all," said Todd Richter, senior vice president of Dean Witter Reynolds in New York. Richter noted that many of OrNda's facilities are overreliant on Medicare and Medicaid revenues, which he expects to be cut in the near future to trim the federal deficit.
Said Ron Spoltore, senior vice president of Healthcare Financial Advisors, a Rancho Mirage, Calif.-based consulting firm: "A lot of OrNda's facilities do have a dominant Medicare and Medicaid population, and when you consider what's going on with those payers, it raises a lot of concerns. I would venture to say that based on my sense of OrNda, a quarter of their properties are not performing to a standard that would be acceptable to Tenet."
Richter noted that some of Tenet's major shareholders are puzzled and displeased with the deal, which they believe was a departure from the company's long-term strategy of cleaning up its balance sheet and finding a buyer. He pointed to the lack of bounce in either company's stock after the announcement was made on Oct. 17 and said Tenet may have overpaid as much as 20% for OrNda.
While he's not likely to downgrade his "neutral" recommendation on Tenet, Richter observed that "this certainly moved my rating from the higher part of the neutral band to the lower."
Wall Street investors yawned at the deal. OrNda stock inched up 25 cents on Oct. 17 to close at $27.50 in New York Stock Exchange trading. Tenet shares dropped 88 cents to close at $21.25 on the NYSE.
But others lauded the transaction, which will give Tenet 41 hospitals in California, 20 in Texas and 16 in Florida. And, despite Richter's puzzlement, rumors about a potential deal between the two operators had been bandied about for months-something more or less confirmed with a statement issued last week by Barbakow.
"During recent months we have come to know OrNda well and we've been impressed with their hospitals and corporate management . . . .OrNda meshes very well with us culturally," he said.
"It really makes sense for them to come together," said Peter Young, president of Healthcare Strategic Issues, a Cape Coral, Fla.-based consulting firm. "I've been saying for the past two years that they needed to come together or swap assets."
Added Cheryl Skolnick, an analyst with Robertson Stephens & Co. in New York: "It just fit together really nicely. Managing these facilities will be extremely easy. They are an excellent geographic complement to each other."
As Barbakow hinted, the Tenet-OrNda deal presents an option for not-for-profit hospitals-particularly on the West Coast-seeking a deep-pocketed partner that isn't Columbia.
"The bringing of Tenet and OrNda together is especially effective in California because both have a significant market presence here," said Steve Valentine, president of the Camden Group, a Torrance, Calif.-based consulting firm. "It probably makes them the largest state network now . . . and that would make you rather line up with Tenet-OrNda than you would with a Columbia."
For the moment, Tenet-OrNda will have a lock on the Southern California market, with 31 hospitals in the region, Valentine said. However, Spoltore believes the oversaturation in the Los Angeles area could mean Tenet will have to shut down some facilities there.
Meanwhile, it will be a catch-up game in Florida, where Columbia-owned facilities will outnumber Tenet's about 4-to-1.
"Yet this gives them enough critical mass (in Florida) to give them clout on manage-care contracting, to bid on the Medicaid contracts shifted to managed care, and also be competitive with Columbia and other emerging not-for-profit networks like Lee Memorial and Baptist of Pensacola," Young said.
Skolnick also expressed concern that Tenet and OrNda could run into antitrust problems as the deal moved forward (See related story, p. 3). But Barbakow dismissed that possibility.
"This deal is going to get closed in March 1997, and it's going to get done as advertised, on time," Barbakow said.
The deal was approved last week by the boards of both companies. It must still be ratified by shareholders as well as regulatory officials.
Under the proposal, Barbakow would continue as chairman and CEO at the combined company.
Charles N. Martin Jr., OrNda's chairman, president and CEO, would become Tenet's vice chairman and would be on the executive committee of the board of directors. Two other OrNda board members also would be added to the Tenet board, which will expand to 14 from 11.
The proposed merger also puts a spotlight on Tenet's ongoing strategy for integrating information systems and how OrNda will fit in.
In July 1995, Tenet signed a seven-year contract to put Dallas-based Perot Systems Corp. in charge of all data processing and electronic communications systems (July 24, 1995, p. 34).
The contract is expected to generate more than $275 million in revenues for Perot Systems, but Tenet said it expected to save $100 million in lower overhead, economies of scale and more efficient data processing.