Triad Tug of War

Investors have strong feelings about the chain.
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Depending on whom you talk to, Triad (TRI) - Get Report is either the opportunity of a lifetime or a disaster waiting to happen.

The hospital chain has tried to set itself apart with an aggressive growth strategy involving joint ventures with nonprofit hospitals and physician groups. But shares have fallen sharply over the last year and a half as the industry has been hit hard by rising nonpayment rates among uninsured patients, among other things.

Now some of the company's critics are starting to wonder when its expensive strategy will pay off. Triad's biggest holder, 6.2% owner TPG-Axon CapitalManagement, says in a recent filing that Triad "has spent all available funds on expansion, resulting in negative free cash flow and dilution to shareholders."

TPG-Axon wants the company to implement new controls, focus more on its existing assets and to start buying back its own stock.

But that's not the only criticism being leveled again Plano, Texas-based Triad. Banc of America analyst Gary Taylor, who rates the stock sell, says the company is

playing accounting games that make its earnings look better than they really are.

A radically different view comes from Sheryl Skolnick, senior vice president of CRT Capital Group. Skolnick, who recently upgraded Triad to buy and believes the stock could go to $48.50 from a recent $38, shakes off the accounting talk.

She sees Triad stock as a screaming buy -- if her theory plays out. Skolnick hypothesizes that the company could soon sell itself in a leveraged buyout like the one that rescued former parent

HCA

(HCA) - Get Report

. By acting now, she adds, the company could "ride on the coattails of the HCA financing."

For its part, Triad defends its accounting and says it remains "committed to our capital strategy." The company recently set in motion a big stock-buyback program.

But some of Triad's plans have begun to unravel already.

In the past few weeks alone, media reports show, joint ventures in Texas and Tennessee have lost support from Triad's intended partners. And some critics question why the company even pursued the Tennessee venture in the first place.

Recent cutbacks in Tennessee's once-generousMedicaid program have left crowds of people therewithout healthcare coverage. But Triad recentlypurchased a hospital there nonetheless.

Peter Young, a business consultant at HealthCareStrategic Issues, views Triad's strategy as both riskyand ineffective. He points to financial reports showing deterioration at certain Triad hospitals as evidence.

Triad remains a big spender, however. In additionto buying and upgrading hospitals, the company isinvesting more than $1 billion in a new computerizedsystem that will streamline its operations.

Triad shareholders have helped the company supportits expensive habits. Last year, the company raisedmore than $200 million by selling stock for $53.62 ashare. The stock rose for a few days afterwards buthas never seen that price since.

No wonder, Skolnick muses, some shareholders feelshortchanged.

Nonetheless, Skolnick offers severalreasons for her faith in an LBO.

With the right partner, she begins, Triad couldstill pursue its growth strategy. After all, shenotes, the company has mentioned unnamed parties thatwould be receptive to that plan.

In contrast, Skolnick believes, some shareholdershave clearly lost their patience with the company andcould choose to launch a distracting proxy fightinstead.

Through an LBO, she says, CEO Denny Shelton couldalso choose his new boss and co-directors rather thanhaving them chosen for him. In addition, she feels, hecould protect his treasured joint-venture partnershipsas well.

"The next several weeks could prove to be apotentially lucrative time to own Triad shares,"Skolnick concludes. "We can't wait to see what happensnext."