Tenet takes diplomatic approach to billionaire investor agreement

The large investor that Tenet Healthcare Corp. made a temporary peace treaty with last week has a well-earned reputation for hospital company activism.

Billionaire Larry Robbins and his company, Glenview Capital Management, own large equity stakes in Community Health Systems, HCA and Tenet. The New York City-based hedge fund also was instrumental in the overhaul and eventual sale of hospital chain Health Management Associates, which was absorbed by Community Health Systems.

And while the benefits of such investors recently have been hotly debated, last year Community Health Systems' CEO Wayne Smith called Glenview's role in the sale of Health Management Associates “the (activist investor) success of the century.”

The scrutiny and influence of stockholders with a lot on the line can keep corporate leaders accountable. But hedge funds often aren't patient. And they can unnerve management. HMA's very battle with Glenview and its eventual fate may have factored into Tenet's recent decision to play nice.

“Our culture at Glenview is to analyze the facts in front of us, and to try to remove emotion or bias from the equation,” Glenview said in a June 2013 letter to HMA shareholders. “In Hollywood terms, we are more Mr. Spock than William Wallace. We were not born to lead fights, but we are simply programmed to follow the logic trail and act accordingly.”

Still, with billions of dollars at stake, even Mr. Spock might sweat a little.

Glenview owns significant shares of health insurers Cigna Corp. and Humana—both of which are in the process of being acquired in multibillion-dollar deals—as well as several pharmaceutical companies, giving the “suggestivist” firm a clear interest in the success of the healthcare industry.

The market value of Glenview's holdings was more than $20 billion as of Sept. 30, according to regulatory disclosures.

Last week, Robbins persuaded Tenet CEO Trevor Fetter and the company's board of directors to create two board seats for Glenview representatives in exchange for a “standstill” pledge not to participate in any shareholder proxy that would disrupt the company's finances and control.

The two sides claim the actions are friendly. The board representatives that Glenview selected, Randy Simpson and Matthew Ripperger, are Glenview partners who are co-leaders of the hedge fund's healthcare practice, according to a joint news release last week. Simpson previously worked on mergers and acquisitions at Credit Suisse before joining Glenview in 2005.

Fetter said he welcomed the help from Glenview, which owns 17.9 million common shares of Tenet, or nearly 18% of its outstanding stock.

But Tenet is struggling with losses, a depressed stock price and negotiations with the federal government that could lead Tenet to paying more than $20 million to settle allegations that its hospitals in Georgia and South Carolina paid kickbacks to get maternity referrals to the system's hospitals. Tenet's stock has fallen roughly 60% since last July.

Enter Robbins, who has previously shown limited patience with turnaround efforts at the hospital companies in which he invests. Glenview single-handedly changed the course of Health Management Associates, the troubled for-profit hospital chain that faced steep losses and federal probes into questionable emergency department practices. Glenview took over HMA's board in 2013 by appointing its own directors, the culmination of a fight that involved HMA filing a “poison pill” to prevent Glenview from initiating a hostile takeover.

The public war of words between Glenview and HMA only intensified during the final months of 2013. Glenview ripped into HMA's executives, saying they had a “consistent track record of underperformance” and that they “failed to establish credibility.” HMA CEO Gary Newsome and Chief Financial Officer Kelly Curry both ultimately left the company before it was acquired by Community Health Systems in a deal valued at $7.6 billion.

Last week's agreement between Tenet and Glenview suggests Tenet didn't want to be taken down the same messy path as HMA. Both of Tenet's new Glenview board members will resign from their roles if Glenview lowers its ownership to 5%, according to the two groups' agreement last week. Only Ripperger will resign if Glenview drops ownership of Tenet to 10%.

Smith's comments were made at a Nashville Health Care Council panel discussing the trend of activist investors in healthcare. The industry could attract more of these investors because dynamic changes such as healthcare reform often create opportunities for “strategy and leadership shifts,” said A.J. Rice, managing director of equity research at investment bank UBS.

Darren Lehrich, managing director at Deutsche Bank Securities, said during the same panel discussion that 73% of investor activists were successful in adding their representatives to boards. He added that there were $115 billion in assets currently under management with activist-style investors.

Glenview and its affliated funds have more than $10 billion under management.