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Clipper Storm Could Toss Tenet

A big shareholder's management change could put a sizable block of stock on the market.

Change is afoot at one of

Tenet Healthcare's

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largest shareholders, and that could mean bad news for an already struggling stock.

For years, the deep-value managers at

Pacific Financial Research

have patiently waited for the ailing hospital chain to recover. Following an extended cold streak, however, some of those managers may soon leave Pacific Financial in the hands of a sister firm that has already given up on the hospital company.

On Jan. 1, Pacific Financial -- owner of 52.6 million Tenet shares and manager of the

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Clipper Fund -- could fall under the control of

Barrow, Hanley, Mewhinney & Strauss

. Pacific Financial and Barrow Hanley have operated separately under the ownership of London's Old Mutual Asset Management, but the looming

departure of Pacific Financial's three top leaders has triggered a reorganization.

Both Pacific Financial and Barrow Hanley employ a deep-value approach, seeking out cheap stocks that promise extraordinary returns to patient investors. But the firms rely on different techniques -- and hold clashing views on Tenet in particular.

Pacific Financial began piling into Tenet's stock shortly after it plummeted in 2002, doubled down as conditions worsened in 2003, and continued to rank as the company's third-largest shareholder earlier this year.

Barrow Hanley also bought a large chunk of Tenet stock for the

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Vanguard Selected Value fund -- which it manages -- after the shares took a big hit. But the firm later lost hope in Tenet following a fire sale of assets that raised questions about the value of the company.

"Last year, we were very excited about Tenet Healthcare Corp., which turned into one of the fund's worst performers," Barrow Hanley portfolio manager Mark Giambrone said in an interview published this year on the Vanguard Web site. "The book value and earnings estimates we had were incorrect -- and much lower than we thought -- and we sold the stock."

As a matter of policy, Barrow Hanley doesn't comment to the media about stocks in its portfolio. But some market watchers fully expect the firm to sell Pacific Financial's big stake in Tenet.

Kunal Kapoor, director of fund analysis at Morningstar, has already warned investors in Pacific Financial's flagship Clipper Fund that big portfolio changes could soon be on the way.

"While we have a high regard for the team at BHMS, we nevertheless think the losses at Clipper are extremely significant for shareholders," Kapoor wrote on Morningstar's Web site when news broke of the shake-up at Pacific Financial. "We're particularly disappointed with the timing of the announcement, given that it comes after a period of underperformance in which fundholders have nonetheless stuck with the fund. Those investors now likely face the prospect of a changed portfolio exactly when they may least desire it."

The Clipper Fund has since retained a consulting firm to evaluate Barrow Hanley "and other alternatives" as managers for the portfolio. Kapoor, for one, expressed some relief that the fund has at least taken this step instead of simply accepting the change.

Meanwhile, Tenet's stock has come under selling pressure already. The stock -- once a $50 highflier -- rose 14 cents to $10.01 Tuesday.

No Tyco

James Gipson, a key Pacific Financial manager who is on his way out, clearly expected better. Gipson started buying Tenet's stock around $15 a share in late 2002,

The Wall Street Journal

reported at the time. Gipson suggested that Tenet -- along with troubled



-- would start to rebound the following year.

"If you fast-forward a year from now, the focus won't be on the bad behavior of the former CEO, as in Tyco; people will instead be focusing on the fundamentals," Gipson told the


on Dec. 30, 2002. "It will be much the same story for Tenet."

But Gipson nailed only one of those predictions. While Tyco's stock rocketed 55% in 2003, Tenet's stock ended the year down 2.1% at $16.05 a share -- and dropped below $13 on news of the massive asset sale just a month later. That plunge came seven months after Pacific Financial reported that it had more than doubled its stake in Tenet's stock, to 48.1 million shares, and owned 10.3% of the company.

Last year, the Tenet Shareholder Committee publicly challenged both Pacific Financial and Brandes Investment Partners -- Tenet's top stockholder -- about the wisdom of their investments in the company. By then, the committee had spent more than four years evaluating Tenet and warning of massive operational challenges. Based on Tenet's poor financial results, the committee felt convinced that both investment firms were destined to lose their giant bets on the company.

Specifically, the committee noted at the time, Tenet was generating less than $400 million in annual earnings before interest, taxes, depreciation and amortization. Going forward, it said, the company would need to more than triple that EBITDA to $1.3 billion in order for investors to simply break even. Furthermore, it said, the company would need to generate more than $2.5 billion in EBITDA to cover its massive liabilities and deliver a healthy return.

"Talk about optimism!" the committee declared. "How can two great investment firms make such assumptions?"

But after nearly three years of lagging performance, with Tenet as a major investment, Pacific Research is headed down a different path. The firm's new managers like companies with low price-to-earnings ratios and enough cash for generous dividends, according to Vanguard's Web site. For some time, however, Tenet has generated no earnings, hoarded any excess cash (for a possible government settlement) and paid no dividends at all.

Moreover, the fund's new managers have placed a big gamble on Tenet already and determined that it's neither a Tyco nor a

Royal Caribbean

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, another beaten-down stock the fund rode to impressive gains.

"Both were cheap stocks, you could argue," Giambrone stated on Vanguard's Web site earlier this year. "But one had a bright future we believed in, and one had an abysmal future that was either priced into the stock at that point -- or we thought it could be even lower."