On November 12, 2010, . Community Health Systems, Inc. (NYSE:CYH) made offer to Board of Directors of Tenet Healthcare Corporation (NYSE:THC). The offer is for CYH to acquire THC for $6.00 per share, including $5.00 per share in cash and $1.00 per share in CYH common stock. The total value of the offer would be approximately $7.3 billion, including $3.3 billion of equity and approximately $4 billion of net debt.
BOD of Tenet rejected the offer on December 6, 2010, stating in a letter to CYH that the offer did not offer "even remotely fair value" to Tenet shareholders
On December 9, 2010, CYH reiterated the same offer to THC by publicizing the offer. Stock price of THC jumped on the news from $4.30 the close price on December 9 to $6.60 the close price on December 10, surpassing the offer price and indicating that investors are expecting a little more from the suitor.
The response from Tenet is something as expected. On the same day, Tenet responded to CYH’s “new” offer. It is a well-thought-of and well-written letter, detailing why Tenet management thought the offer is inadequate. This is the summary paragraph:
Tenet Board considered that Community Health’s opportunistic proposal would transfer the growth potential inherent in Tenet to Community Health without adequately compensating Tenet shareholders. The Tenet Board believes that the interests of Tenet shareholders would be better served by benefiting from 100% of the upside inherent in Tenet rather than accepting Community Health’s inadequate proposal. In addition, the Board has serious concerns about Community Health’s ability to integrate and operate a business like Tenet.
Of course CYH will not give up on a good investment idea, so on December 20, 2010, it announced that it is nominating its slate of BOD’s in THC’s annual shareholder’s meeting. The entire board of THC is subject to re-election in2011.
To the credit of Tenet management, it issued a statement on the same day, defending its position on the offer and standing by its current board of directors. The statement stated that “The Company has not yet scheduled its 2011 Annual Meeting of Shareholders”.
Further on January 7, 2011, Tenet adopted a Right Agreement in order to ”protect stockholder value by attempting to diminish the risk that our ability to use our net operating losses (collectively, the ‘NOLs’) to reduce potential future federal income tax obligations may become substantially limited.” The Right Agreement will dilute the shares of any acquiring person if case that person acquires 4.9% or more shares of the company. Further, the company amended its Bylaw of the company and remove the the restriction that the annual meeting of stockholders must be held not later than 210 days following the Company’s fiscal year end and instead provide that the annual meeting of stockholders shall be held on the date and at the time as set by the Board. Late on, on March 28, 2011 Tenet announced the annual 2011 meeting will be November 3, 2011.
On January 10, 2011, CYH announced that it has nominated 10 Highly Qualified Nominees to Represent Best Interests of Tenet Shareholders. Wayne T. Smith, chairman, president and CEO of CYH made the following comment:By just saying no to our 40 percent premium offer, installing a poison pill with a 4.9 percent trigger, and delaying the 2011 Annual Meeting for six months — instead of entering good-faith discussions with us — Tenet’s highly paid Board has clearly demonstrated its entrenchment. Tenet shareholders deserve better. Accordingly, we have today taken the first step in running a full slate of 10 highly qualified independent directors to replace the existing Tenet Board. If elected, these directors will act in the best interest of Tenet’s shareholders and carefully evaluate the value-creation opportunity represented by the CHS offer.
The high point of this drama is on April 11, when Tenet filed a lawsuit alleging CYH of overbilling Medicare program. Tenet estimates improper Medicare billings of between $280 million and $377 million over three years, beginning in 2006, for as many as 82,000 patients.
As people familiar with the industry observed, the new defensive technique adopted by Tenet has raised questions over billing practices across the entire industry. While Tenet has accused Community Health only in using such practices, the charges of Tenet have invited more scrutiny of the federal regulators.
In the meantime, CYH is not deterred, its Chairman and CEO issued the following statement:
“Tenet’s allegations are completely without merit and we intend to vigorously defend ourselves against these unfounded and irresponsible claims. Providing high-quality patient care is the Company’s most important priority. CHS conducts its business with the utmost integrity and adheres to the highest business practice standards. The bottom line is that these self-serving allegations are an attempt by Tenet’s management and board to continue their entrenchment strategy and to distract Tenet shareholders from CHS’s pending offer. Its actions today prove that Tenet has adopted a ‘scorched earth’ defense without regard for the best interests of shareholders. CHS remains committed to its offer to acquire Tenet and both Credit Suisse and Goldman Sachs have reaffirmed their confidence in financing the transaction.”
Scorched earth or not, investors now have the opportunity to buy CYH at the price at more than 20% discounted from two days ago.
CYH stock declined from over $40 dollars to a low point of a low point of a little over $23 on Monday, April 12, 2011. On Tuesday, it has recovered to around $31.5 per share.
CYH is one of the GuruFocus highly predictable company, and now it is selling at a discount.
Tenet, on the other hand, is trading at $6.6 per share, higher than than the CYH offer of $6 per share. Market is expecting a bit more from CYH or some other suitor.