Hospital owner Community Health Systems, Inc. (NYSE:CYH) (“CHS”) extended an offer to another hospital owner Tenet Healthcare Corp. (NYSE:THC) on December 9, 2010. The series of event after that has been rather dramatic as I detailed in my previous article.
On Monday, CHS changed the terms of the offer: The previous CHS offer was for $5.00 per share in cash and $1.00 per share in CHS common stock for each THC shares; the new offer is $6.00 per share in cash.
On Tuesday, CHS filed to dismiss the lawsuit filed by Tenet, citing the new all-cash offer eliminates any basis for a federal securities lawsuit. Despite the lawsuit, CHS management repeated its willingness to talk to THC management about the deal. Yes, CHS wants the deal pretty bad. Here is what Wayne Smith commented in the April press release:
“Despite the value-destroying defensive tactics employed by the Tenet Board, we remain ready to engage in constructive discussions to move this transaction forward without further delay. As we have made clear, we would welcome the opportunity to review any additional information Tenet can provide and are prepared to recognize any additional value it can demonstrate.”
Is it right for Tenet management to hold out? Is it true that CHS’s offer is not in the ballpark of the value Tenet sees itself in? Let’s run some numbers.
Valuation of CHS and Tenet
GuruFocus has a DCF Calculator with which one can get a quick estimate of the intrinsic value of any stock by simply tying in the symbol.
Typing in CHS’s symbol “CYH”, the other fields are populated for you. It shows as of last year, CYH made about $3.01 per share, and default assumption for the growth rate of the next ten years is 14%. You can change the number anyway you want. In the past 10 years, CHS’s earnings grew about 14% per year, so as the first of approximation, the assumption is not far off.
Further, assuming a 4% terminal growth rate and 12% discount rate, one obtain a fair value of $27.45, about 14% lower than the current stock price of $31.2.
Repeat the same calculation for Tenet. On per share basis, Tenet actually has had a declining revenue and a flat but mostly negative earnings during the past the 10 years. During the past year, it made $0.32 per share after years of loss. Let’s be overly generous and assume a growth rate of 10% for the next 10 years. Assuming the same terminal growth rate (4%) and discount rate (12%), one reached an fair value of $5.68 per share.
Despite the fact that the stock has dropped about 25% since the Tenet lawsuit, CHS's stock does not represent a good bargain at this price.
It appears Tenet does not offer any margin of safety to investors. To hospital owners such as CHS, synergy kicks in and the balance of equation could be tipped in favor of the buyout -- it is just not obvious. It is hard for an investor to pay $6.00 per share, let alone the $6.60 as it is currently sold at.