No quick fixes available for next CEO at Tenet Healthcare
Buy, sell, hold course. Whatever the decision, there won’t be any quick fixes for whoever takes over for ousted Tenet Healthcare Corp. CEO Trevor Fetter.
The for-profit healthcare company carries $15 billion in debt making it prohibitively expensive to be purchased outright. And its three main divisions—hospitals, United Surgical Partners International and Conifer Health Solutions—are unlikely to bring enough money at sale to sufficiently reduce debt or, in the case of the hospital business, has no buyer desiring to buy it whole, said Mizuho Securities analyst Sheryl Skolnick.
Tenet bought the majority of USPI, a giant ambulatory surgery center chain, in 2015 and now owns an 80% stake.
Conifer is Tenet’s revenue-cycle business that provides software to hospitals and doctors to help them register patients, authorize their insurance and bill them and payers for care.
Tenet owns 77 hospitals,
including two in Philadelphia that the company announced Friday it is selling for $170 million to American Academic Health System, a newly formed affiliate of Paladin Healthcare.
“Nobody can or would buy the whole thing,” Skolnick said of Tenet.
It’s been a rocky week-and-a-half for Tenet. Glenview Capital Management resigned two Tenet board seats on Aug. 22 to push the company’s turnaround from the outside. Then on Aug. 31, the company announced that Fetter would leave by March 2018, or earlier if a replacement is found.
Skolnick said she spoke by phone Thursday with Fetter and that he was stepping down to avoid a protracted proxy fight with Glenview that would have distracted the company from the difficult turnaround it is trying to execute. Tenet did not respond to a request for comment.
Selling Conifer—which relies on Tenet hospitals and a few other large customers for most of its revenue— would likely fetch just $1 billion in net proceeds that could be used to pay down debt, said Jefferies & Co. healthcare analyst Brian Tanquilut.
Skolnick called USPI the crown jewel of Tenet. Yet, even if the division were sold at a high 12 times USPI’s annual earnings before interest, taxes, depreciation and amortization, that would leave about $2 billion for debt reduction.
To get that 15% reduction in debt, Tenet would be giving up a division that generates about 21% of its EBITDA, Skolnick said.
That leaves individual hospital sales—and the hard daily grind of im- proving hospital operations—as the best way for the next CEO to unlock value for hedge fund Glenview, which owns 18% of Tenet, and other investors, she said.
HCA, the nation’s largest investor-owned hospital company, recently bought Tenet’s three hospitals in Houston for $750 million, and has told Tenet what hospitals it has an interest in, according to Skolnick.
Tenet is divesting hospitals
in markets where it can’t attain first- or second-place market share. The CEO change and an announced restructuring of Tenet’s board of directors could accelerate those sales, Tanquilut said.
A prime example of selling hospitals in ones and twos was on display Friday when Tenet agreed to sell to Paladin its Hahnemann University Hospital and St. Christopher’s Hospital for Children in Philadelphia, along with Tenet-owned physician practices.
That leaves Tenet in much the same boat as Community Health Systems, another money-losing hospital chain with big debt that has sold or agreed to sell a total of 30 hospitals in small batches.
As in the case of Franklin, Tenn.based CHS, Skolnick sees Tenet selling its noncore hospitals to regional not-for-profits and maybe smaller hospital chains to fetch the 10 to 12 times EBITDA that CHS has been getting on its sales.
She said the urgency that Glenview is demonstrating by leaving Tenet’s board and ultimately prompting Fetter’s ouster is heightened by a nationwide softening of admissions that will make the turnaround at Tenet even more difficult.
“If revenue isn’t growing, you have to reduce capacity, and that’s painful,” she said.