Vanguard Health Systems, Inc. (VHS), Tenet Healthcare Corp (THC): An Interesting Deal in the Healthcare Sector

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Recently, Vanguard Health Systems, Inc. (NYSE:VHS) surged dramatically in one trading day, up nearly 70% thanks to the buyout offer from Tenet Healthcare Corp (NYSE:THC). Tenet Healthcare Corp (NYSE:THC) agreed to pay $21 per share in cash to acquire Vanguard Health Systems, Inc. (NYSE:VHS), with a total transaction value of around $1.73 billion. Is Vanguard Health Systems, Inc. (NYSE:VHS)’s deal good for Tenet Healthcare Corp (NYSE:THC)? Let’s take a closer look and find out.

Vanguard Health Systems, Inc. (NYSE:VHS)Business snapshot of Vanguard and Tenet

Vanguard Health Systems, Inc. (NYSE:VHS) is a large operator of regional integrated health and healthcare delivery networks, with 28 hospitals and related facilities in several regions in the U.S. including Phoenix, Massachusetts, Chicago, Detroit and Texas. Most of its revenue, $5.23 billion, was generated from the Acute Care Services segment, while the Health Plans segment produced only $757.4 million in 2012 revenue. The majority of EBITDA, $520.3 million, also came from the Acute Care Services segment while the Health Plans segment’s EBITDA was $55.4 million in 2012. Vanguard Health Systems, Inc. (NYSE:VHS) had employed a quite leveraged structure in its operations. As of March 2013, it had only $357.5 million in equity, $528.8 million in cash & restricted cash, and nearly $3 billion in debt. The $3 billion in debt includes $1.16 billion in 8% senior secured notes and more than $1 billion in credit facility.

Tenet Healthcare Corp (NYSE:THC) is considered a health care services company, operating around 49 hospitals and 117 outpatient centers and Conifer Health Solutions centers in two main segments: Hospital Operations and other, and Conifer. Most of its adjusted EBITDA, more than $1 billion, was generated from the Hospital Operations and other segment, while the Conifer segment produced $105 million in adjusted EBITDA in 2012. Tenet Healthcare Corp (NYSE:THC) also employed a lot of debt in its operations. It had $970 million in equity, only $95 million in cash, and more than $5.4 billion in debt.

A good deal for Tenet?

Tenet Healthcare Corp (NYSE:THC) expected that Vanguard Health Systems, Inc. (NYSE:VHS) acquisition would be accretive to the company’s earnings right in year one. It also delivered around $100-$200 million in annual synergies, including overhead reduction and revenue cycle management efficiency and improvement. The leverage ratio would stay in the range of 4.75 to 5 by the end of next year. According to Tenet, the acquisition would increase the combined company’s scale, with 79 hospitals and 157 outpatient centers, making it the number one or two largest in 19 important markets. Moreover, it could boost Conifer’s existing patient accounts and revenue. After the deal, Conifer revenue would experience 28% increase, from $890 million to $1.14 billion. Tenet CEO Trevor Fetter seems to be quite excited about the deal, mentioning that it is “a turning point for Tenet.”

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