Tenet Healthcare Corporation (THC), the third-largest publicly-traded hospital operator in the U.S., and smaller rival Vanguard Health Systems (VHS) avoided the sea of red on Wall Street Monday morning by announcing a definitive agreement whereby Tenet will acquire Vanguard for $21 per share in an all-cash deal valued at $4.3 billion, including debt. Tenet will absorb $2.5 billion in Vanguard debt as part of the transaction as it significantly broadens its presence in the United States and enters new domestic markets. Bank of America Merrill Lynch committed the financing for acquisition.
The purchase price represents a 70-percent premium to Vanguard’s closing price on Friday.
Both boards have approved the transaction, which is expected to be closed by the end of 2013 and be accretive to earnings in the first year. Annual synergies are expected between $100 million and $200 million.
“This acquisition will take Tenet into new geographic markets, expand the breadth of our service offerings, diversify our earnings sources and increase the benefits we expect to realize under healthcare reform,” said Trevor Fetter, president and chief executive at Tenet.
Hospital stocks have climbed this year on an overhauled healthcare system that should benefit hospitals as more Americans are covered by health insurance. Starting in 2014, Medicaid programs in several states are expanding coverage, upping income eligibility requirement and citizens will receive income-based tax credits to help pay for insurance. The Affordable Care Act is expected to provide insurance for more than 25 million uninsured people.
The deal will boost the number of hospitals that Tenet owns to 79 and outpatient facilities to 157. It also gives Tenet a position in 16 states and opens two new markets in Texas. Headquartered in Nashville, Tennessee, Vanguard owns and operates 28 acute care and specialty hospitals and complementary facilities and services in Chicago, Illinois; Phoenix, Arizona; Detroit, Michigan; San Antonio, Texas; Harlingen and Brownsville, Texas; and Worcester and Boston, Massachusetts.
Outside of Texas, the two companies had virtually no overlap in markets. Dallas-based Tenet operates hospitals and centers in Pennsylvania, California, Texas, Alabama, Florida, Georgia, Missouri, North Carolina, South Carolina and Tennessee.
“Together, we now have the scale and strength to achieve the vision we have pursued in parallel,” commented Charlie Martin, Vaguard’s founder, chairman and CEO. Upon closing, Martin will become a member of the merged company’s board. Keith Pitts, Vanguard’s current vice chairman, will assume the same position at Tenet.
Additionally, Tenet’s Conifer Health Solutions business will also benefit from new business of Vanguard customers. Conifer assists hospitals in operational and revenue cycle management.
Shares of VHS shot to near the acquisition price at the opening bell, representing an all-time high for the stock. Shares of THC are trading ahead by about 3 percent at $43.10 after spiking as high as $46.20 shortly after the opening bell.
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