Critics See Steep Decline at Tenet
Tenet
(THC) - Get Report
may never escape from the intensive-care unit.
The Tenet Shareholder Committee, a group that has correctly diagnosed Tenet's problems in the past, heard a "death rattle" when the ailing hospital chain released a drastic recovery plan last month. In its darkest prognosis yet, the committee predicted Monday that Tenet will sell off its healthiest assets -- leaving a small company with huge obligations -- in its uphill battle to survive. But ultimately, the committee warned, Tenet's days could be numbered.
"We have indicated in the past that we believed Tenet could run out of cash by the end of 2005," the committee's latest report says. "Today, we wonder whether they will make it until the end of the year."
The group issued its new report after Tenet announced late last month that it will
shed 27 hospitals -- essentially giving some away in its core market of California -- as part of a desperate turnaround strategy. With anticipated proceeds of just $600 million, most of it in future tax benefits, the fire sale could actually worsen Tenet's already fragile condition.
"The tax benefits will only be received
if
the company produces net income in the future," wrote Jeff Villwock, a health care analyst who has been evaluating Tenet on behalf of the shareholder committee for years. "This cash from tax savings, if ever received, will not be collected prior to 2006 and, therefore, does nothing to help the company's current liquidity crisis."
In the meantime, Villwock said, Tenet's lenders -- who were warned last month of a likely covenant violation -- will probably cut the $1 billion credit line that currently represents Tenet's largest chunk of liquidity. Ultimately, Villwock sees Tenet ending the year with just $680 million in available liquidity at a time when a single government probe could cost the company nearly three times that amount.
"This
stock is nothing to be bought," he told
TheStreet.com
on Monday. "You've got to be a real optimist to think that this will end well."
Tenet's stock slid 4.5% to $12.23 following the downbeat shareholder report.
Second Opinion
Tenet itself insists it will recover.
Following the shareholder report on Monday, the company announced that it had taken "another critical step in rebuilding Tenet's operations" by selecting a company insider to become its new operating chief. Tenet pointed to Reynold Jennings, formerly president of the company's eastern division, as the most qualified person to lead the 69 "core" hospitals that will remain in Tenet's portfolio.
"As our board and I considered the attributes we wanted in a chief operating officer for Tenet, it was clear that Reynold Jennings had them all," Tenet CEO Trevor Fetter announced on Monday. "Because of his deep knowledge of Tenet and our industry, Reynold is uniquely positioned to make an immediate difference by leading our people to reinvent operations and get our hospitals back on the path to competitive, sustainable growth."
Fetter pointed out that Jennings already oversees some of the company's strongest assets. But the new COO has some black marks on his record, too. As
TheStreet.com
highlighted last October, Jennings presided over two markets -- Dallas and New Orleans -- that came under regulatory fire for actions that took place under his watch. The latter region, where Jennings served more recently, remains the focus of an ongoing government probe.
Tenet also revealed on Monday that it has reassigned its other divisional president. Randolph Smith, formerly president of the western division, will simply oversee the hospitals being sold.
"A respected, long-time Tenet executive ...
Smith will devote all his time to leading the 27 hospitals being divested and helping them through the transition period," the company announced Monday.
But Villwock has already warned that the procedure will be painful. He says that hospitals typically see admissions plunge -- and costs soar -- when they go up for sale. As a result, he predicts that Tenet is already losing $10 million a week and suspects that the bleeding will get worse over time.
Fire Sale
Moreover, he says, Tenet will emerge with little to show for its pain.
"They're selling $2.7 billion worth of assets and hoping for $600 million in after-tax proceeds," Villwock told
TheStreet.com
on Monday. "They're taking 10 cents on the dollar. ... That tells you that these hospitals are in awful shape."
Villwock expects Tenet to part with healthier assets -- in markets such as Florida and Texas -- going forward. Indeed, he believes the company could wind up selling all of its strong hospitals just to pay off regulatory and legal settlements. He estimates that Tenet has overcharged Medicare at least $1.9 billion for lucrative "outlier" procedures alone. And he doubts the government will take it easy on a company that has already paid record-breaking fines in the past.
For its part, the Tenet Shareholder Committee predicted the worst.
"We think it is very likely that the government will come down hard on them, given that Tenet has a previous felony conviction and has now been accused of violating its five-year corporate integrity agreement in each and every year," the new shareholder report states. "Is there any real possibility for survival?"
Villwock seriously doubts that Tenet can secure the quick $1.5 billion "global settlement" some are anticipating. He believes the outlier settlement itself could exceed that amount. And he warns that the fines will just keep coming.
"There are so many investigations," he said. "And at the end of each and every one, there will be a payment."
Court Calendar
Villwock also pointed out that a number of civil cases, filed against the company's hospital in Redding, Calif., will begin to go trial this year. Those cases, accusing the hospital of profiting from unnecessary -- and sometimes fatal -- heart surgeries, are expected to cost the company as much as $1 billion.
Meanwhile, Villwock said, Tenet is generating negative cash flow. And the company itself has already warned that it can't make any money until at least 2006.
On Monday, the Tenet Shareholder Committee took issue with the timing -- as well as the nature -- of that recent warning. The group pointed out that Tenet unveiled its shocking financial update only after an accelerated deadline had passed to nominate new directors who might steer the company back to health.
Tenet suddenly announced on Jan. 16 that this year's shareholder meeting would be held in May instead of July. That change, the committee said, triggered a 10-day deadline for nominating board members. Two days after that narrow window passed -- without any new nominations -- the company sprang its drastic recovery plan on the market.
The shareholder committee called the move an act of "blatant self-preservation." But the group suspects that Tenet could still face an ugly demise in the end.
"We believe the company's Jan. 28 announcement was beginning of the real denouement of Tenet," the new shareholder report states. "Over these past almost four years, we have been right about Tenet. ... If we are wrong now, won't it be the first time?"