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Updated from 8:33 a.m ET with afternoon share prices and additional analyst comments
NEW YORK (
Tenet Healthcare(THC - Get Report) is buying
Vanguard Health Systems(VHS) in a deal that further consolidates the U.S. healthcare industry in the wake of the passage of the
Affordable Care Act (ACA), which was mostly upheld by the U.S. Supreme Court about a year ago.
Tenet's proposed acquisition of Vanguard Health Solutions values the hospital network at $21 a share, or roughly $1.8 billion, and comes at a 70% premium to the company's Friday closing share price. Monday's deal values Vanguard at $4.3 billion when including Tenet's assumption of $2.5 billion in the company's debt.
The deal indicates that the healthcare industry is consolidating on multiple fronts in the wake of the ACA, commonly referred to as 'Obamacare.'
Tenet's acquisition of Vanguard focuses on the sprawling U.S. hospital and healthcare practice industry, which is quietly in the
throes of consolidation, according to industry sources.
The company will expand its total base of hospitals to 79 and its number of outpatient facilities to 157, the company said in a statement. Vanguard Health Solutions will also further diversify Tenet into states such as Texas and increase the company's overall footprint to 16 states.
Tenet highlights states such as Texas should see a fast rising base of customers in the wake of 'Obamacare,' in a Monday press release. Analysts have noted the Act may increase the number of users of hospitals and outpatient facilities, while also reducing companies' bad debt expense, given an expected increase in overall healthcare coverage nationwide. States previously lagging in coverage may see the biggest change.
Vanguard Health Systems shares were rising over 69% in pre-market Monday trading to $20.96, just below Tenet's offer price. Tenet shares were rising nearly 4% to $43.42 a share, indicating investor comfort with the debt and premium attached to its acquisition.
Private equity giant
Blackstone Group(BX) is Vanguard Health Systems largest shareholder, with a 37.9% stake in the company's outstanding shares, according to a May 31
Securities and Exchange Commission filing. Vanguard shares have struggled after a June 2011 initial public offering, however, Monday's deal values the company's shares about 17% above its IPO price.
"This acquisition will take Tenet into new geographic markets, expand the breadth of our service offerings, diversify our earnings sources and increase the benefits we expect to realize under healthcare reform," Trevor Fetter, Tenet chief executive, said in a statement.
Vanguard could boost Tenet Healthcare's 2014 earnings per share by up to 10% given synergies expected in the merger, according to Deutsche Bank analyst Darren Lehrich. With all synergies realized, Tenet's earnings per share could grow by up to $5.65 a share, the analyst said in a client note.
In the past year, Tenet's shares have gained over 100%, as investors brace for healthcare industry consolidation and the earnings impact of 'Obamacare.'
"[We] do not see any significant [Federal Trade Commission] concerns in getting the deal approved," A.J. Rice, a UBS analyst, wrote in a Monday note.
Already a lot has happened in the industry, as major players across the healthcare spectrum position for dramatic change in coming years.
Leading up to the passage of the act, pharmacy benefit managers such as
Express Scripts (ESRX),
CVS Caremark (CVS) and
Walgreens(WAG) have used mergers to expand their
networks in anticipation of changes to the cost structure of prescription drug plans.
Cigna(CIG) even bought HealthSpring in a push into the pharmacy benefits space, while other players have sought to bring prescription drug benefit plans in house, challenging the revenue of consolidators such as Medco Health Solutions. Medco was acquired by Express Scripts in one of the industry's largest-ever mergers.
Healthcare providers have also been hard at work trying to position for a rapid change to Medicare and Medicaid as 'Obamacare' kicks in over the next 12-to-18 months. At around the act's passage and affirmation by the Supreme Court,
Amerigroup(AGP)merged, followed shortly thereafter by a
Aetna(AET - Get Report) and
There are likely more deals to come.