An Interesting Deal in the Healthcare Sector

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Vanguard Health Systems (NYSE: VHS) surged dramatically in one trading day, up nearly 70% thanks to the buyout offer from Tenet Healthcare (NYSE: THC). Tenet Healthcare agreed to pay $21 per share in cash to acquire Vanguard, with a total transaction value of around $1.73 billion. Is Vanguard’s deal good for Tenet? Let’s take a closer look and find out.

Business snapshot of Vanguard and Tenet

Vanguard is a large operator of regional integrated health and healthcare delivery networks, with 28 hospitals and related facilities in several regions in the U.S. including Phoenix, Massachusetts, Chicago, Detroit and Texas. Most of its revenue, $5.23 billion, was generated from the Acute Care Services segment, while the Health Plans segment produced only $757.4 million in 2012 revenue. The majority of EBITDA, $520.3 million, also came from the Acute Care Services segment while the Health Plans segment's EBITDA was $55.4 million in 2012. Vanguard had employed a quite leveraged structure in its operations. As of March 2013, it had only $357.5 million in equity, $528.8 million in cash & restricted cash, and nearly $3 billion in debt. The $3 billion in debt includes $1.16 billion in 8% senior secured notes and more than $1 billion in credit facility.

Tenet is considered a health care services company, operating around 49 hospitals and 117 outpatient centers and Conifer Health Solutions centers in two main segments: Hospital Operations and other, and Conifer. Most of its adjusted EBITDA, more than $1 billion, was generated from the Hospital Operations and other segment, while the Conifer segment produced $105 million in adjusted EBITDA in 2012. Tenet also employed a lot of debt in its operations. It had $970 million in equity, only $95 million in cash, and more than $5.4 billion in debt.

A good deal for Tenet?

Tenet expected that Vanguard acquisition would be accretive to the company’s earnings right in year one. It also delivered around $100-$200 million in annual synergies, including overhead reduction and revenue cycle management efficiency and improvement. The leverage ratio would stay in the range of 4.75 to 5 by the end of next year. According to Tenet, the acquisition would increase the combined company’s scale, with 79 hospitals and 157 outpatient centers, making it the number one or two largest in 19 important markets. Moreover, it could boost Conifer’s existing patient accounts and revenue. After the deal, Conifer revenue would experience 28% increase, from $890 million to $1.14 billion. Tenet CEO Trevor Fetter seems to be quite excited about the deal, mentioning that it is “a turning point for Tenet.”

Tenet seems to have a good deal. At $21 per share, Vanguard is valued at only 6.7 times its trailing EBITDA. The acquisition valuation is much lower than the current valuation of Tenet. At $43.80 per share, Tenet is worth $4.5 billion on the market. The market values Tenet at a higher EBITDA multiple of 8.3.

The deal could make MedAssets better off?

According to Sterne, Agee & Leach featured in Barron’s, this recent acquisition could benefit MedAssets (NASDAQ: MDAS), the provider of technology-enabled solutions to hospitals, health systems and other non-acute healthcare locations. Sterne, Agee & Leach believed that MedAssets’ biggest client is Tenet; thus, the acquisition of Vanguard could create an additional $3 billion new opportunity for MedAssets. Indeed, over time MedAssets could gradually target Vanguard’s business as an growing revenue source, based on the existing relationship with Tenet. For the full year 2013, MedAssets management expected to generate $670 to $684 million in revenue and $1.22 to $1.32 non-GAAP EPS. The non-GAAP adjusted EBITDA might come in at $215 to $225 million. MedAssets is trading at around $17.60 per share, with the total market cap of $1.1 billion. The market values MedAssets at 9.2 times its trailing EBITDA.

My Foolish take

Tenet seems get the good deal at its current offering price, with the lower valuation than its current market valuation. With the potential annual savings from synergies and the larger operating scale, Tenet seems to be a good buy for long-term investors. 

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