Tenet takes diplo­matic ap­proach to bil­lion­aire in­vestor agree­ment

Modern Healthcare - - INVESTOR-OWNED HOSPITALS - By Dave Barkholz and Bob Herman

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 multi­bil­lion­dol­lar 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 Glen- view’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.

The in­dus­try could at­tract more of these in­vestors be­cause dy­namic changes such as health­care re­form of­ten cre­ate op­por­tu­ni­ties for “strat­egy and lead­er­ship shifts.”

A.J. Rice Man­ag­ing di­rec­tor of eq­uity re­search UBS

GETTY IM­AGES

Glen­view Cap­i­tal CEO Larry Rob­bins (above) per­suaded Tenet CEO Trevor Fet­ter and the com­pany’s board of di­rec­tors to cre­ate two new board seats for Glen­view rep­re­sen­ta­tives in ex­change for a “stand­still” pledge not to par­tic­i­pate in any share­holder proxy that would dis­rupt the fi­nances and con­trol of the com­pany.

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