Although we don’t believe in timing the market or panicking over market movements, we do like to keep an eye on big changes — just in case they’re material to our investing thesis.
What: Shares of acute care and specialty hospital operators Vanguard Health Care (NYSE:VHS) and Tenet Healthcare Corporation (NYSE:THC) vaulted higher by as much as 70% and 10%, respectively, after Tenet Healthcare Corporation (NYSE:THC) announced a deal to buy Vanguard Health Care (NYSEARCA:VHT).
So what: Under the terms of the deal, Tenet Healthcare Corporation (NYSE:THC) will acquire Vanguard Health Care (NYSEARCA:VHT) for $1.8 billion, or $21 per share, while also assuming its $2.5 billion in net debt. Tenet Healthcare Corporation (NYSE:THC) has arranged financing through Bank of America Corp (NYSE:BAC)/Merrill Lynch and plans to refinance Vanguard Health Care (NYSEARCA:VHT)’s debt to a lower interest rate once the deal is complete. The impetus behind the move for Tenet Healthcare Corporation (NYSE:THC) is that it’ll move the hospital operator into new markets and greatly expand its hospital revenue management segment as we enter the final months before the full implementation of the Patient Protection and Affordable Care Act, also known as Obamacare.
Now what: I’d certainly say that Vanguard Health Care (NYSEARCA:VHT) shareholders are walking away like bandits with a 70% premium on a hospital stock that I already considered to be possibly the most overvalued of the bunch. While I understand Tenet Healthcare Corporation (NYSE:THC)’s reasoning behind the move and the urge to expand prior to Obamacare’s full implementation, my concern grows as it takes on more debt to pay out a hefty premium — 25 times forward earnings — for Vanguard Health Care (NYSEARCA:VHT). There’s little doubt in my mind hospital operators will benefit from a reduction in doubtful accounts due to the individual mandate portion of the PPACA, but I’m not certain I feel as strongly about this deal as investors do. I would suggest hitting the sidelines for a few quarters and letting the inevitable “merger hiccups” run their course.
The article Why Tenet Healthcare and Vanguard Health Systems Shares Soared originally appeared on Fool.com.
Fool contributor Sean Williams owns shares of Bank of America Corp (NYSE:BAC), but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of, and recommends, Bank of America Corp (NYSE:BAC).
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