Tenet's Top-Spot Tension

Some observers say only a new CEO can lead a turnaround.
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Some observers believe a prompt change at the top could help ease

Tenet's

(THC) - Get Report

pain.

Some fans of the Dallas-based hospital chain believe CEO Trevor Fetter and his management team are at last poised to pull off a long-promised turnaround. They applaud recent developments such as the promotion of Stephen Newman to the operating chief post and the addition of former Florida Governor Jeb Bush to the board.

But others believe even the upgraded management team isn't up to the task. They point out that Tenet has struggled for years to regain the trust of doctors who keep sending patients to competing hospitals, and they say the company needs a CEO who will have credibility with physicians.

Jeff Villwock, managing partner of Genesis Capital and a longtime trader in Tenet shares, believes Tenet should hire

Triad

(TRI) - Get Report

CEO Denny Shelton. He says Shelton is known for his strong rapport with physicians and could soon be jobless, following Triad's looming merger with

Community Health Systems

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.

"As smart as Trevor is, he does not have a great relationship with doctors," Villwock says. "Tenet needs to fix that. Trevor can't get there; Denny can."

Peter Young, a business consultant at HealthCare Strategic Issues, offers up another scenario. He would like to see Newman, named in November to become the first doctor ever to serve as operating chief at Tenet, run the company outright.

"I ultimately think that he -- or a person with a similar background and track record -- has to be CEO," Young says of Newman. "And I think that it's probable that the change will come within a year."

Unhappy Campers

Tenet Chairman Edward Kangas says he has heard no shareholder requests for leadership changes. He calls it "simply irresponsible" to suggest that such demands exist.

To his credit, Fetter has succeeded in pulling Tenet through a trying period marked by hefty legal challenges and tough industry financial conditions. Some observers believe he deserves a chance to repair the company as a result.

Sheryl Skolnick, a senior vice president of CRT Capital Group who rates Tenet stock buy, fears a change at the top now could bring "an immediate halt" to any turnaround.

"Trevor knows the business inside and out," Skolnick says. "I do believe that the company finally has the right team in place."

Still, some shareholders are clearly unhappy. Calpers, the nation's largest public pension fund, recently placed Tenet on its Focus List of 11 companies needing changes because of their "lagging stock, financial

and governance performance." Based on Calpers' report, Tenet has lost 82% of its market value over the past five years.

And while Fetter has succeeded in settling Tenet's legal problems, competing in a tough industry environment remains a stark challenge. Villwock says Tenet has about $850 million in the bank. This year, he says, the company expects to blow through about $300 million of that -- leaving it with just $550 million to compete in a capital-intensive business.

Villwock agrees that Newman's appointment marks a "significant positive" for Tenet. But he stakes a rebound on teaming Newman up with Shelton.

Background Check

Shelton declined to be interviewed for this story. But he is no stranger to Tenet, as he noted back in 2003, when Tenet was last hunting for a CEO. Shelton told

Modern Healthcare

that he had "no interest in leaving Triad" but had "many friends and associates" at Tenet, where he spent a decade before moving on to HCA.

Of course, Shelton too has his detractors. He has won over physicians and patients by investing heavily in hospitals and supplying them with plenty of staff. But shareholders have paid a price. High expenses have hurt margins. Frustrated Triad shareholders were ready to accept a leveraged buyout even before Community Health stepped in with its acquisition plan.

Whatever happens, industry observers say Tenet's tenuous position actually makes the job more appealing to some possible candidates.

"I've been told by CEOs of other major health care corporations that walking in as CEO of Tenet would be the biggest challenge of their career -- and they say that with a gleam in their eye," Villwock says. "They say, 'Wouldn't that be something to walk into that company and fix it -- actually fix it forever? Wouldn't that be something?'"