Tenet, CHS battle debt and admissions softness as activist investors circle

Hospital giants Community Health Systems and Tenet Healthcare Corp. are in the midst of turnarounds that would be difficult under the best of circumstances.

Neither has the best of circumstances.

Mizuho Securities healthcare analyst Sheryl Skolnick notes a long-term softening in hospital admissions across the nation that snagged both hospital companies in the second quarter.

Tenet posted a net loss of $56 million in the quarter on a same-facility admissions decline of 1.4%, while CHS lowered its full-year earnings and revenue guidance after a $137 million net loss on a 2.5% admissions drop.

Meantime, activist investors at each company who had been monitoring turnaround efforts from the shadows burst into the public light in the past week with their gloves off.

First, Glenview Capital Management, Tenet's largest shareholder with an 18% stake, resigned its two board seats after a year's time, citing "irreconciliable differences" with management and the board. Glenview said it would work from outside the company to improve shareholder value without specifying how.

Investor patience with CHS' yearlong turnaround also is running thin.

Less than a week after activist shareholder Tianqiao Chen raised his stake in CHS to 22.1% from 13.7%, Steven Braverman, managing director of CHS investor ASL Strategic Value Fund, publicly called for ousting CEO Wayne Smith.

Braverman said in light of low stock prices, CHS shareholders should attempt to claw back some of the $350 million in compensation that Smith has received since CHS went public in 2000. Shares today are below the $13 they traded at during the initial public offering. CHS Friday declined to comment.

Whether the outside pressure can hasten turnaround efforts will become evident in the coming weeks and months.

Both CHS and Tenet—respectively, the second- and third-largest investor-owned hospital companies by operating revenue—are in restructurings that take time to execute, said Megan Neuburger, Fitch Ratings manager director. They each have outsized debt loads hamstringing available cash for changes, she said. And both are divesting hospitals in their smaller markets to pay off debt.

Tenet is generating free cash flow that is just slightly more than its $900 million per year debt service on debt that is 7.3 times earnings before income, taxes, depreciation and amortization. Fitch has assigned Tenet's bonds a "speculative" B rating with a stable outlook.

Tenet is smartly increasing its stake in ambulatory giant United Surgical Partners International as care shifts from inpatient to lower-cost outpatient settings for many procedures, said Jefferies & Co. analyst Brian Tanquilut. Tenet used $750 million generated from the sale of three Houston hospitals to pay back a loan used to raise its stake in USPI to 80%.

But Tenet is still losing money and its cash flow actually turned negative in each of the past two quarters.

Investors have occasionally called for Tenet to sell its Conifer Health Solutions revenue-cycle division to raise cash. But while a case can be made for that, Tenet hospitals and USPI capture patients in both an inpatient and outpatient setting and can't be easily split, Neuburger said.

CHS' situation is just as daunting. Despite the sale of 20 hospitals, CHS' debt is still 7.8 times EBITDA, even higher than Tenet's. And its debt service is $800 million to $850 million annually on debt of about $14.7 billion.

CHS has shed hospitals and cut costs. It's now down to 130 hospitals after starting the year with 150.

Braverman at ASL suggested that CHS be aggressive in selling more hospitals since any price above 7 times EBITDA is higher than CHS' current stock performance and would add to shareholder value. CHS has fetched 10 to 12 times EBITDA on the 30 hospitals sold or contracted so far.

Skolnick said the monthslong trend that dropped national admissions growth from 3% to 4% per year to 1% to 2% will continue before conditions stabilize for Tenet, CHS and others.

"It gets worse," she said.