Crescent City Cools to Tenet Healthcare

A stubborn stock sinks as the hospital chain confronts a seething mess in New Orleans.
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Until recently, even

Tenet Healthcare's

(THC) - Get Report

harshest critics had come to wonder if anything short of a so-called act of God could bring the company's stock down.

For years the Dallas-based hospital chain has attracted plenty of skeptics. Tenet has been bleeding red ink ever since it gave up an aggressive pricing strategy, and some government probes tied to those practices remain unresolved. Yet Tenet shares spent the better part of 2004 and 2005 holding steady in the low teens, as management insisted that a long-promised turnaround was at hand.

But then Hurricane Katrina smashed ashore this summer in New Orleans, saddling the hospital chain with a revenue slowdown, a raft of hefty repair bills and a bushelful of questions about its stewardship during the city's trying times. Tenet committed itself to rebuilding its presence in the Crescent City, but some observers wonder if New Orleans even wants the company back.

After all, employees at Tenet's Memorial Medical Center are fielding questions about 45 deaths there in the wake of Katrina. What's more, local officials are trying to seize another Tenet hospital in the region based on charges that the company abandoned the facility while it was still operable.

For its part, Tenet has denied any wrongdoing, joining others in applauding the efforts of its New Orleans workers. Even so, the company looks newly vulnerable -- and its stock, which has lost more than a third of its value in the space of two months, is showing the strain.

The shares dropped a dime Wednesday to $7.43, hovering near lows last seen 12 years ago.

Bailing Out

Before the hurricane, Tenet operated five of its 69 core hospitals in the New Orleans region.

The company's two downtown New Orleans hospitals, including Memorial, suffered extensive flood damage and remain shuttered even now. But nearby Meadowcrest Hospital, which fared much better, faces an uncertain future as well.

Competing West Jefferson Medical Center, a nonprofit controlled by the local parish government, began proceedings back in September to seize control of Meadowcrest after the hospital allegedly "abandoned" the facility and skirted its responsibilities to the public. In response, Tenet has sued the nearby hospital for allegedly making a lowball offer for a facility that will give it an unfair monopoly in the area.

Chill Wind
Tenet tanks after Katrina

West Jefferson has, in turn, countersued.

"As a result of Hurricane Katrina's landfall," the parish's lawsuit claims, "Meadowcrest Hospital had no flood damage and, as set forth above, had sufficient and adequate electrical power to operate. In fact, all conditions at Meadowcrest Hospital were improving during the abandonment period. The one constant," the complaint adds, "was the presence of indigent patients in the community."

For its part, Tenet has stated that it evacuated the hospital due to threats of violence and ongoing concerns about security. However, the parish claims that Louisiana Attorney General Charles Foti -- who is now investigating possible "mercy killings" at Memorial -- sent his own special agents to help out with Meadowcrest after the storm. Foti himself confirmed that account with

TheStreet.com

and went on to say that the hospital evacuated the premises anyway.

That evacuation took place several days after Katrina first hit the city, the lawsuit claims. And it came about even after local workers voted overwhelmingly to keep on manning the facility, the lawsuit adds.

Moreover, the evacuation apparently left quite a mess behind. The lawsuit mentions soiled linens, unsecured narcotics and even "empty containers of beer and wine" at the scene.

"The evacuation of Meadowcrest Hospital was completely chaotic and jeopardized patient safety," the complaint states. "WJMC fears that if Meadowcrest Hospital faces similar circumstances to that which it faced during the abandonment period, or shortly prior thereto, Meadowcrest Hospital will again desert Meadowcrest Hospital and abandon satisfying the healthcare needs of persons found within the district."

Tenet spokesman Steven Campanini told

TheStreet.com

that Meadowcrest served the community "before, during and after Hurricane Katrina" and that West Jefferson has no legal right to take over the hospital.

Tenet claims that it should retain control of Meadowcrest so local patients will have a choice between two separately owned facilities that must offer them fair prices. Two years ago Tenet tried to shoot down similar arguments when it tried to buy a different hospital in another region of New Orleans.

Ultimately, local voters voted by a 3-to-1 margin not to let Tenet buy a second hospital in the New Orleans suburb of Slidell. They rejected the proposal after critics warned about the company's tainted reputation in other parts of the country.

In a follow-up article with the

New Orleans Times-Picayune

, former Slidell Mayor Sam Caruso went on to suggest that the suburb's nonprofit hospital should at least seek a suitor that's not under investigation "from the Atlantic to the Pacific" next time around.

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."