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Tenet Lowering Bar on Asset Sales

The cash-hungry company may take in even less than expected in selling a bunch of hospitals.

The smoke is clearing around



fire sale.

For months, Tenet has cautioned that investors should expect only modest cash proceeds from its many planned divestitures. The Santa Barbara, Calif.,company plans to whittle its hospital group down by more than a quarter in hopes of returning to profitability in 2006.

But comments on this week's earnings conference call suggest that the struggling chain may be hard-pressed to book even the small sums it hasmentioned. If so, the company's cash situation may be more tenuous than investors thought.

To be fair, Tenet's modest cash balance has actually improved since the final quarter of the year. But the company still expects to generate negativecash flow this year and, quite possibly, next. It also faces billions of dollars in potential liabilities.

So Tenet would certainly welcome any extra cash it can get.

The company has targeted proceeds of $600 million from the disposition of 27 hospitals, most of them in California. But Tenet has said only half that sum is likely to be in cash.

Granted, those aren't huge numbers for a company posting cash flow losses in the hundreds of millions, even as quarterly revenue remains well north of $2billion. Disclosures made Tuesday, though, raise additional questions about Tenet's cash situation.

When questioned during a conference call on Tuesday, Tenet CFO Stephen Farber said that the company has included a big accounts receivable balance-- which it expects to retain and hopes to collect on -- in the asset sale proceeds forecast.

"All of that is basically baked into the general proceeds expectations," Farber confirmed.

The company's latestquarterly report quantifies receivables associated with the planned divestures at $394 million. This figure indicates that Tenet may be relying on accounts receivable collections for all of its cash proceeds -- and that it could wind up with a cash loss of nearly $100 million on the asset sales in the end.

And the full accounts receivable balance may nevereven materialize as cash.

"I wonder how much is collectible," said one investor who shorted Tenet's stock after Tuesday's conference call. "In particular, if some of thehospitals have to be shut down, the A/R will simply peter out, and the portion collected will obviously be consumed in maintaining the operation throughclosing."

Big Challenges

The short-seller, who is highly familiar with the hospital industry, went on to explain that Tenet -- which is already struggling to collect on some bills -- will face even bigger collection challenges at hospitals that it sells. He said that managed care payers, now responsible for just under half of Tenet's revenue, will be less inclined to pay -- or even negotiate -- with Tenet when they no longer rely on the company's former hospitals to treat their customers.

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"So Tenet will take more than the usual dent in accounts receivable," he concluded. "And then we're down to almost nothing on the sale of these hospitals."

Indeed, he continued, Tenet could wind up spending more to shut down some hospitals than it actually collects from their receivable accounts.

But Peter Young, a business consultant who caters to the hospital industry, believes that Tenet could realize a notable portion of the receivables overall.He points out that Tenet relies on dependable payments from the government for more than one-quarter of its revenue. And he doubts that managed care companiescould simply abandon their responsibilities without facing some "huge breach-of-contract issue."

Still, Young views the self-pay portion of Tenet's business -- totaling 17.5% of net revenue -- as nearly worthless. And he, too, notes the modest valueassigned to Tenet's "noncore" hospitals after backing receivables out of the total.

"It really raises questions about the attractiveness of these hospitals," he said.

Long Lines

For its part, Tenet has announced no plans yet to close the targeted hospitals. Indeed, Farber told analysts on Tuesday that Tenet has attracted a "fairly long list of

potential buyers," numbering in thehundreds, and could wind up in advanced negotiations with some of them by the next quarterly update. But some people have raised questions about whether Tenetwill find takers for its older hospitals, which require expensive infrastructure improvements, particularly in the high-cost market of California.

Tenet is attempting to sell 19 hospitals in theGolden State, more than a dozen of them in the Los Angeles area alone.

"I think there is a threat that some of the hospitals will close down," Lauri Sobel, an attorney for the watchdog group Consumer's Union, told

earlier this year. "We know how much work it is to find buyers for one hospital -- let alone 19 throughout the state and 15 in one county."

Right now, Tenet has booked both the hospitals held for sale -- valued at $985 million -- and the A/R balances tied to them as current assets. So the sales process could reduce Tenet's total assets by more than $1 billion and still leave the company without any cash proceeds afterwards.

To be fair, Farber indicated that Tenet's liabilities will decrease as well. The company has not indicated by how much, however.

Regardless, Argus bond analyst Bill Eddleman is concerned about the potential hit to Tenet's balance sheet. Indeed, he remains worried about the company's condition in general.

"They anticipate a net cash loss

from operationsof $500 million to $600 million for the year, and there is still no resolution of any of the major legal issues facing this company," said Eddleman, whorecommends selling Tenet's bonds. "This corporation is in very serious difficulties."

Change of Heart

But the stock market -- and at least one former bear -- would disagree. The stock has rallied hard on a recent quarterly update that, at the very least,contained no new bombshells and even some favorable developments in crucial trends such as bad debt. The shares rose again on Wednesday, climbing 1.4% to$12.27, after Prudential Equity analyst David Shove abandoned his long-time underweight recommendation on the company.

Shove upgraded his rating to neutral and his price target to $13 because he feels that Tenet's latest quarterly report "provided significantly betterearnings and liquidity visibility."

"It may not be light," he acknowledged. "But at least we can see the tunnel."

Shove has grown more confident that Tenet canprofitably operate the 69 core hospitals that will remain in its portfolio after the asset sales conclude. He also believes that Tenet's improved cashbalance -- up $123 million to $466 million since the end of the year -- should "lay to rest concerns over Tenet's liquidity" and signal an escape from the looming cash crunch that even he once feared. Meanwhile, he seems less concerned about the "unquantifiable" liabilities from government probes that have bothered him so much in the past.

Young believes such confidence -- especially in Tenet's latest quarterly results -- could be misplaced, however.

"The numbers are down from what was a bad quarter in the industry last year," Young noted. "The operational numbers say performance is moving down,not improving ...

and the situation will not getbetter in the slower quarters."

Looking ahead, Tenet still faces challenges beyond its operations. The company remains under investigation by multiple government agencies for, among other things, allegedly profiting from unnecessary surgeries and defraudingMedicare in the process.

Granted, Shove now estimates Tenet's total exposure at less than $1 billion -- and possibly even half that amount -- for its alleged misconduct. ButEddleman is far more cautious. He believes that Tenet could face close to $3 billion in lawsuit claims and government penalties.

Eddleman also doubts the company can shield itself from exposure to ReddingMedical Center -- where many questionable heart procedures took place -- by treating the hospital as a subsidiary responsible for its own liabilities.

"Nice try, guys," he said. "But I don't think it will fly. ... With all of its legal problems and its level of liabilities, I don't know how this company is going to survive."