Vanguard deal would bolster Tenet in key markets

(Story updated at 4:30 p.m. ET.)

Two years after Nashville-based Vanguard Health Systems' initial public offering, the nation's smallest publicly traded hospital operator said it would join forces with Tenet Healthcare Corp. in an all-cash, $1.8 billion deal.

For Dallas-based Tenet, the acquisition allows it to enter new markets quickly, build strength in its current stronghold of Texas and take advantage of Vanguard's health plan assets, such as Phoenix Health Plan in Arizona. The hospital giant said it will pay $21 per share and also assume $2.5 billion in Vanguard's debt, bringing the total price tag to $4.3 billion. Vanguard shares closed Friday at $12.37, exactly one year after its initial public offering priced at $18 per share.

If the transaction goes through—expected by the end of 2013—it would be the largest among investor-owned hospital chains in recent years. Tenet was itself a takeover target not long ago when Community Health Systems initiated a hostile bid that ultimately failed.

On an analyst call, Tenet President and CEO Trevor Fetter noted that the deal will expand its geographic strength from 49 hospitals in 24 markets to 79 hospitals in 30 markets; the deal includes Vanguard's current portfolio of hospitals as well as two deals that are under letters of intent and two hospitals under development in San Antonio, according to a Tenet spokesman.

“We will now be No. 1 or No. 2 in 19 key markets,” said Fetter, who also cited Tenet's entry into the Texas markets of San Antonio and Brownsville-Harlingen. “Our revenues will double in the fast-growing state of Texas.”

Tenet currently has $1.5 billion in revenue in the state, Fetter said in an interview. The opportunity is even greater under healthcare reform, he added, since many uninsured Texans are expected to qualify for subsidized private coverage through the federally operated health insurance exchange.

With Tenet's portfolio concentrated in cities such as Houston and El Paso, Fetter said there are no acute-care hospitals and only two small surgery centers that operate in the same market—San Antonio.

“We don't believe that should pose a problem at all,” he said.

The deal is not expected to raise significant concerns about greater consolidation and higher healthcare costs because Tenet would not gain additional market power in any individual markets.

The Texas attorney general could partner with the Federal Trade Commission in reviewing the deal, said Jay Levine, an antitrust attorney at law firm Bradley Arant Boult Cummings in Washington. If there are overlaps, divestitures would be a possibility.

In addition to the larger geographic footprint, Fetter pointed to Vanguard's experimentation with new payment models, such as its participation in the Medicare Acute-Care Episode (or ACE) Demonstration Project, as well as its health plan operations, as attractive features of the deal.

Fetter told Modern Healthcare that the deal gives it the added expertise to introduce more risk-based contracting, such as accountable care organizations, in its markets.

Vanguard has been on a buying spree in recent years. At the end of 2010, the company bought multihospital Detroit Medical Center and made a significant financial commitment to turn around the financially flagging urban provider.

On the call, Fetter said that “a large part of Vanguard's revenue comes from hospitals that are relatively new to its system.” He praised Vanguard's turnaround abilities while also noting that Tenet will be able to accelerate those efforts.

He added that Vanguard has focused primarily on acute-care acquisitions, which allows Tenet to add more ambulatory care centers in its existing markets.

Charlie Martin, Vanguard's founder, chairman and CEO, plans to join Tenet's board of directors, while Vanguard Vice Chairman Keith Pitts will retain that management title with Tenet.

A spokesman for Vanguard declined to comment on how the deal came about or what it would mean for its operations in Nashville, other than to say that Tenet expects to maintain a Nashville presence.

Fetter said that buying another multihospital system allows Tenet to quickly build scale, noting that a single-hospital purchase it plans in Northern California has taken more than a year to close. “It has been very difficult for us to find acquisitions we like of single hospitals,” he said.

Tenet Chief Financial Officer Dan Cancelmi noted that the company paid a “modest multiple for Vanguard compared to historical transactions in this sector.”

The companies expect the deal to yield $100 million to $200 million in annual “synergies” from revenue-cycle management improvement, overhead reduction and supply chain management, according to Tenet's presentation to analysts.

Tenet has 49 hospitals, according to its website, with significant footprints in Texas, California, Florida and Georgia. The company reported $749 million in operating income on revenue of $9.1 billion in its 2012 fiscal year, which ended Dec. 31.

Vanguard operates 28 hospitals in Texas, Arizona, Michigan, Illinois and Massachusetts. In the first nine months of the current fiscal year, which ends June 30, the company earned $51 million on $4.5 billion in revenue.

Follow Beth Kutscher on Twitter: @MHbkutscher