Crescent City Cools to Tenet Healthcare

Far Afield

To be sure, Tenet faces major battles well beyond New Orleans.

Perhaps most notably, Tenet has spent years fighting off criminal charges in its big southern California market. The company's Alvarado Hospital Medical Center, located in San Diego, stands accused of illegally bribing physicians in exchange for patient referrals. The company claims that it offered legitimate "relocation agreements" instead.

Following an earlier mistrial, jurors will decide as early as this week whether Tenet obeyed the law or not. A favorable decision could finally clear the way for a global settlement with the federal government. A guilty verdict could bar Alvarado from doing business with Medicare and, even worse, jeopardize Tenet hospitals in other markets -- including New Orleans -- where physician agreements have come under government scrutiny as well.

In the meantime, Medicare reports gathered by management critics at the Tenet Shareholder Committee show that roughly half of the company's hospitals have already started losing money. Moreover, the reports show, the rest have been making far less money than they once did.

Given Tenet's deteriorating condition, Banc of America analyst Gary Taylor this month finally gave up on a possible recovery. He now values the company as a breakup/acquisition candidate instead of a turnaround play. He offers several scenarios -- even valuing the company by its real estate assets alone -- when arriving at his new target price of $5 a share.

"We believe THC could possibly (but not feasibly) generate $5 billion to $6.5 billion of proceeds by selling all of its real estate assets," writes Taylor, who has recommended selling the stock for some time. "The amounts would be enough to pay off all THC's current net debt plus our estimated after-tax government settlement of $900 million, leaving THC with zero debt and $1 billion to $2.4 billion of cash -- obviously a nice-looking balance sheet."

Of course, Tenet would have no real business left. Thus, even a long-awaited government settlement -- paid off in full -- could fail to save the company in the end.

"The announcement (of a global settlement) could rally the stock but not our fundamental outlook," Taylor concludes. Even "after a settlement, we believe it is more likely that all of the company's assets are sold, at a price below $8 a share, than it is feasible for the company to continue as an independent entity."