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Currently, a major news in the healthcare industry is the culmination of the pending acquisition of Vanguard Health Systems Inc. by hospital operator Tenet Healthcare Corp. (THC - Analyst Report), much ahead of the scheduled time. Tenet entered into a deal to acquire Vanguard in Jun 2013 and it was expected to culminate by the end of this year. Share prices of Tenet responded positively to this news, shoring up 6.1% to $43.90 on Oct 2, 2013.
As previously decided, Tenet paid $21 per share or an aggregate value of $4.3 billion to acquire Vanguard. The $4.3 billion all-cash deal includes debt worth $2.5 billion, which was acquired from Vanguard.
To fund this transaction, senior notes worth $4.6 billion were issued by Tenet in Sep 2013. The aggregate offering of $4.6 billion comprised of $1.8 billion aggregate principal amount of senior secured notes carrying an interest rate of 6% per annum and due in 2020, and $2.8 billion aggregate principal amount of senior unsecured notes carrying an interest rate of 8.125% per annum and due 2022.
Following the issuance, Moody’s Investor Service, the credit rating agency of Moody’s Corporation (MCO - Analyst Report) allotted debt ratings to this $4.6 billion note issuance. Moody’s rated the $1.8 billion notes to “Ba3” while the $2.8 billion notes were provided with a “B3” rating. Now with the closing of the deal, another credit rating agency Fitch Ratings affirmed Tenet’s Issuer Default Rating at “B”, senior secured credit facility and senior secured notes at “BB/RR1” and senior unsecured notes at “B–/RR5” as it expects the deal to enhance the geographic scope of Tenet’s portfolio. Additionally, Fitch stated that the entirely debt funded transaction has led to a pro forma debt-to-EBITDA of 5.7x for the combined entity, and total secured debt to EBITDA of 2.9x.
With the culmination of this deal, Tenet will now retain its headquarters in Dallas and some operations in Nashville (the headquarters of Vanguard). At present Tenet operates 77 acute care hospitals, 173 outpatient centers, five health plans and six accountable care organizations. The non-overlapping business of Vanguard brings in 28 new acute care and specialty hospitals across Texas, widening Tenet’s exposure to areas of child and heart care. The acquisition further complements the company’s strategy of expanding its operating and competitive leverage in the metropolitan markets via inorganic growth. This acquisition will thus diversify Tenet’s business portfolio.
As per the healthcare reforms in the U.S., effective Jan 1, 2014, it will be mandatory for the U.S. citizens to have medical insurance coverage. This provides ample growth opportunities for healthcare providers as well. With its enhanced product offering, due to the Vanguard acquisition, Tenet is well positioned to cater to the additional demand and capitalize on the opportunities to ramp up its growth profile.
Tenet Healthcare currently carries a Zacks Rank #3 (Hold). Among other healthcare companies, MEDNAX Inc. (MD - Snapshot Report) and Avita Medical Limited (AVMXY) with a favorable Zacks Rank #2 (Buy) are worth considering.