Tenet Sees Dismal Week

The company's shares slide after a cut in guidance and a flurry of warnings from analysts.
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is discovering firsthand how it feels to go under the knife.

The ailing hospital chain -- known for its high-risk surgeries -- had to cut profit and cash-flow estimates this week after botching its previous guidance. Its shares slipped dangerously into the red as a result. Then more complications set in. Wall Street analysts declared the company unhealthy, and the rating agencies whacked away at Tenet's credit.

Before it was all over, Tenet had set a new multiyear low -- bottoming out at $11.69 on Wednesday. And the company isn't necessarily headed for the recovery room yet.

Jim Moriarty, a Houston attorney whose clients accuse Tenet of performing unnecessary surgeries, predicted the worst for the company. "It's death by a thousand cuts," he said.

Common shareholders are certainly feeling the pain. "The board of directors can no longer passively stand by as this management team plots its survival," said M. Lea Pearce, chairman of the Tenet Shareholder Committee, this week. "Tenet's patients, employees and shareholders deserve nothing less than a completely reconstituted Tenet Healthcare."

In the meantime, Wall Street is losing hope. On Monday, when Tenet first shared its dismal prognosis, three different analysts downgraded the stock. And Prudential analyst David Shove, who cut the stock to sell, hinted that he wouldn't be back to check on the company until it takes some powerful medicine to save itself.

Shove called for nothing less than "the financial version of shock and awe" -- employed by radically altered leadership -- to revive the company. "After two transformation efforts and an impotent management team, we think Tenet's untapped asset value will remain so," Shove said. "Until we see a concrete transformation plan for Tenet, we will step to the sidelines."

Paying the Price

For now, Tenet continues to pay for its past. Tenet's old "growth" strategy, fueled by aggressive Medicare billing, has left the company tainted by investigations and scrambling for profits. Minor surgery hasn't helped, either. Even after the removal of three top executives, including embattled Chief Executive Jeffrey Barbakow last month, the company is still gasping. And new problems just keep bubbling to the surface.

Stripped of generous "outlier" checks -- paid by Medicare for risky procedures -- Tenet is no longer a cash machine. Indeed, as Moody's pointed out Wednesday, Tenet isn't much of a cash generator at all. Clearly concerned by Tenet's dark outlook, Moody's slashed the company's credit three full notches to junk and warned of a treacherous future.

"The rating downgrade reflects Moody's concerns that unanticipated revenue and expense pressures will contribute to dramatically lower-than-expected cash flow, essentially eliminating Tenet's free cash flow," the agency said. "Although we expect Tenet to comply with financial covenants over the near term, we are concerned about compliance in future periods."

Tenet, which previously aimed to deliver earnings of $1.34 to $1.65 a share this year, is now looking for a profit of $1 a share. In the meantime, the company must suspend stock repurchases and spend every extra cent to pay down a debt load that could tip past acceptable limits.

Meanwhile, Standard & Poor's -- which still rates Tenet a notch above junk -- pulled the knife out after Monday's profit warning as well. "Although some of these issues are already considered in the rating," S&P said of Tenet's challenges, "the growing list of concerns and their uncertain magnitude creates the possibility that the credit profile may be more risky than indicated by the current investment-grade rating."

Spending Habits

Meanwhile, in an interview early this month with the

Santa Barbara News-Press

, local officials expressed concern that Tenet might leave the expensive resort town. They said Fidelity National Financial -- the county's only other Fortune 500 company -- was already packing up to seek out cheaper quarters. And they said they could offer no real breaks to keep Tenet there. Indeed, they described corporate exits as part of a "natural cycle" for businesses that locate in the posh California town. Tenet responded by saying it has no real plans to leave. But the Tenet Shareholder Committee -- which has long pushed for a move to Dallas -- calls the company's fancy address a luxury it can no longer afford.

Indeed, the group insists that Tenet has wasted enough shareholder money already. In an announcement this week, the committee blasted Tenet for risking the company's future to pay for expensive habits now. It took particular aim at Tenet's strategy of peddling successful hospitals to invest in $1.4 billion worth of stock that's plummeted in value.

"It is obvious that the company needs every dollar of earnings that it has, and it would be a foolish waste of assets to continue a process of selling earnings," said the shareholder committee's Pearce. "In our opinion, this entire policy of selling assets and repurchasing stock has been a disaster."

Prudential's Shove, for one, believes the situation may already be out of hand. He clearly expects the hospital's already on the block. And he would like to see management hit the door first. "Despite the financial and legal woes, we believe Tenet's hospital portfolio may have untapped value. However, we think Tenet's current management is not up to the task of unlocking this value --simply, we believe the time has come for radical change," Shove said.