Spinning off from Tenet could signal positive future for Conifer

Tenet Healthcare Corp.’s plan to spin off its revenue-cycle subsidiary could be good news for the future independent company, which will be free to spend money as it wishes.

“You’re liberating the spinoff company to redeploy capital in a way that is most aligned with the nature of that subsidiary as opposed to the nature of the parent,” said Brian Brownschidle, executive director with XMS Capital Partners.

The Dallas-based hospital chain was gunning to sell Conifer Health Solutions, but after 18 months of fielding underwhelming offers settled on a tax-free spinoff, after which Conifer will be a separate, publicly traded company. The transaction won’t be finalized until the end of the second quarter of 2021, pending regulatory approval and other logistical hurdles.

This could be a positive outcome for Conifer. A stand-alone business specializing in a higher-margin, growth area like healthcare information technology can more easily justify acquisitions that are additive to its core business than if it were part of a larger corporation, Brownschidle said.

Plus, shares in a tech-enabled company like Conifer will likely trade higher on the stock market than Tenet’s, which trade on par with other hospital companies, said John Ransom, a managing director of healthcare equity research with Raymond James & Associates.

In any case, Conifer’s CEO, Stephen Mooney, jumped ship. Tenet announced his departure in the same news release as the Conifer spinoff, although Tenet CEO Ron Rittenmeyer said in an interview the two events are unrelated. “It’s very positive; no negative,” Rittenmeyer said. “We’re not pushing him out the door.”

Conifer Chief Operating Officer Kyle Burtnett has assumed the CEO role on an interim basis while the company seeks a permanent replacement.

Tenet isn’t the first big company to spin off a healthcare arm. General Electric Co. announced about a year ago plans to jettison its profitable healthcare business. German industrial manufacturing firm Siemens’ healthcare spinoff, Siemens Healthineers, hit the Frankfurt Stock Exchange in March 2018.

Revenue-cycle management is a consolidated industry, and it’s “sticky,” meaning hospitals tend to stay with the vendors they use, said Brian Tanquilut, a healthcare equity analyst with Jefferies. That is, unless hospitals are sold. Then the buyer can use whichever revenue-cycle provider it prefers. Would-be suitors for Conifer were spooked by the fact that Tenet, Conifer’s largest customer, is still divesting hospitals, Tanquilut said. When those hospitals are sold, there’s no guarantee the buyer will stick with Conifer.

Some bidders wanted Tenet to guarantee that if it sold a hospital, the buyer would continue to use Conifer or, if it didn’t, Tenet would pay Conifer’s owner for the sold hospital’s revenue-cycle management, Rittenmeyer told investors on a call last week. That’s not something the company would agree to. Other bidders didn’t want to be accountable for collecting 100% of Tenet’s cash, another deal-breaker.

Tenet received nine preliminary bids to purchase Conifer, including three that were high enough to consider. The company spoke with 74 potential buyers overall.

Saum Sutaria, Tenet’s chief operating officer, told investors that Conifer’s capabilities have evolved over the past two years, despite the difficulty of doing so during the dealmaking process. He said the market for revenue-cycle outsourcing is still strong and growing.

Analysts question whether this transaction will significantly reduce Tenet’s debt. The aim of a sale would have been to pay down Tenet’s long-term debt, which was $14.8 billion as of March 31.

Rittenmeyer said the spinoff will still lower Tenet’s debt by shifting some of it to Conifer, although he won’t say how much until six months before the deal closes. “There’s no way we plan to load up Conifer and cause that to have a capital structure problem on the way out,” Rittenmeyer said. “We want it to be successful, so it’s a balancing act.”