Struggling Tenet ( THC) seeks salvation in a hedge fund named after the mythological beast that guards the gates of hell.

Correspondence obtained by TheStreet.com indicates that the cash-strapped hospital chain hopes to sell some of its ailing Los Angeles hospitals to the venture capital firm Cerberus Capital Management. New York-based Cerberus is a so-called vulture investor known for its acumen in picking up troubled assets on the cheap.

The push comes as Tenet, hit by a string of quarterly losses and continuing negative cash flow, seeks to trim its hospital group by more than a quarter and return to profitability in 2006. Though the sides haven't reached a deal, any interest on the part of Cerberus could come as welcome news to Tenet, whose efforts to divest itself of some 27 hospitals have been moving slowly.

Even so, some observers are already lashing out at the prospect of a Cerberus purchase. Analysts doubt thrifty Cerberus will pay what Tenet wants for the properties, leaving the hospital operator short of its goal of raising $600 million in proceeds. Moreover, some Tenet critics fear that some potential buyers are interested more in the underlying real estate than in the hospitals themselves -- a focus they say could serve to undermine services in hard-hit communities.

"They've got the money" at Cerberus to buy the hospitals, says Jeff Villwock, an analyst for Caymus Partners. Villwock has followed Tenet for years on behalf of the Tenet Shareholder Committee, a group of former hospital execs and investors who four years ago waged a losing proxy battle for control of the company's board. "But do they have the hospital operators?"

Cerberus did not return a phone call seeking comment for this story. But Tenet said the company remains focused on transferring the hospitals to "qualified" buyers.

"Interest in the remaining facilities is strong, and negotiations are continuing," Tenet spokesman Steven Campanini told TheStreet.com. But "the sale process, including the potential buyers, is confidential."

On Monday, Tenet's shares were unchanged at $11.89.

L.A. Confidential

Tenet has been trying since January to find buyers for 27 hospitals -- half of them in Los Angeles County -- as part of its recovery plan. The company has managed to sell a few hospitals since that time but, until last week, none in the Los Angeles area.

Last Monday, Tenet announced that it had located a buyer for four of its Los Angeles facilities. A small California hospital company, owned by physician Jonathan Wu, has agreed to buy the Tenet facilities -- all located in Asian communities -- in a $100 million transaction.

Tenet's stock jumped 2% on the news. The company also celebrated.

"This agreement lives up to the commitment we made to seek qualified buyers who intend to continue to operate these facilities as acute-care hospitals with 24-hour emergency departments and serve the health care needs of their communities," Tenet CEO Trevor Fetter said in a prepared statement last week.

But Cerberus has been sniffing around as well. The firm has been specifically identified as a possible buyer in emails sent out by a competing bidder hoping to buy three Tenet hospitals in west Los Angeles.

That group, a local outfit known as Hospital Acquisition 005, told members last month that Tenet was in discussions with the big investment fund.

"We indicated to Tenet that they may not be the most desirable buyer, since their commitment may well be single-mindedly to get a return on fund investment with potentially little regard for the community," HA005 Chairman Michael Finnigan wrote. "They are an unknown, and we are not aware that they have any relevant hospital management expertise."

Nothing Succeeds Like Success

Cerberus has certainly shown expertise in buying distressed assets at the right time. Last year, for example, Cerberus spent $189 million to get a 9% stake in bankrupt Air Canada. It has loaded up on the debt of other cash-strapped companies such as Alamo Rent-a-Car and WorldCom, now known as MCI ( MCIP), as well.

Over the years, Cerberus has exploded into a $9.5 billion fund. But last September, Canada's Financial Post warned the public against expecting any favors from the firm when covering its planned investment in Air Canada.

"Cerberus is in business to wring as much money out of this situation as it possibly can," the newspaper wrote. "There's nothing wrong with that at all, but anyone who thinks the fund is motivated by some sort of altruistic vision of fairness is sadly mistaken."

Argus bond analyst William Eddleman, who recommends selling Tenet's debt, describes Cerberus as a "very shrewd" firm that knows how to profit from distressed assets. For one thing, he says, Cerberus is a "bargain basement" buyer with a knack for getting assets cheap.

"Cerberus won't overpay," he says.

Location, Location

Lark Galloway-Gillian, executive director of the nonprofit Community Health Council in Los Angeles, wonders why a firm like Cerberus would even be interested in Tenet's hospitals. The firm isn't necessarily one to buy assets and then just flip them for a quick profit.

But Galloway-Gillian worries that Cerberus might actually be less interested in the hospitals -- which need expensive improvements -- than in the valuable Los Angeles real estate on which they sit. And she says that only four of the 10 remaining Los Angeles facilities are protected by restrictions, ensuring continued health care service, that must be honored by the new owners as well.

HA005 is already eyeballing three of those protected facilities. The group hopes to snag Centinela Hospital Medical Center, Daniel Freeman Memorial Hospital and Daniel Freeman Marina Hospital for just $20 million, according to a figure cited in an email to HA005 members early this month.

Three years ago, Tenet ponied up $55 million for the Daniel Freeman hospitals alone. It had previously acquired Centinela as part of a $3.1 billion merger with OrNda eight years ago.

"We wish to report that all indications are that we are one of the groups -- and perhaps the leading group -- engaged with Tenet in serious discussions for these properties," HA005's Finnigan wrote. "If we come to an agreement ... Tenet is making known its desire to sign and close as quickly as possible at every meeting."

All told, Tenet expects to generate $600 million -- much of it in tax benefits -- by slashing its hospital portfolio.

"The word on the Street is that Tenet will not obtain" even that much, Villwock says. "Clearly, Tenet will be taking a very large loss -- in the billion-dollar range -- on those hospitals."

Galloway-Gillian, for one, expresses surprise at HA005's low-ball offer for three of Tenet's hospitals. But she goes on to say that Centinela -- once a strong performer -- has weathered a sharp drop in cardiac business due to a government probe of the hospital and its surgeons.

HA055 itself has indicated that the hospitals it hopes to buy are in real financial trouble.

"We were made aware by Tenet that the deterioration in volumes, managed care revenues and bad debts is more severe than we had believed," Finnigan wrote in a May email to HA055 members. "We want to be sure we have a handle on the current circumstances and a credible plan for improvements in the future before we determine whether we will formulate an offer and what the terms of that offer might be."

The Overhang

The hospitals face more than financial woes. Centinela and Daniel Freeman Memorial are among three Tenet facilities currently being questioned by federal prosecutors about their lucrative cardiac business. Redding Medical Center, a fourth Tenet hospital, has already paid a record fine to settle allegations that it profited from unnecessary heart surgeries. Redding's former star physicians remain under scrutiny, however. And the Los Angeles Business Journal reported earlier this year that Apex Cardiology Consultants -- a high-profile practice at Centinela -- has fielded a subpoena and appears to be the focus of an investigation by the U.S. Attorney's office in Los Angeles.

At least two cardiologists from Apex are now part of the HA005 group trying to buy Centinela and the Daniel Freeman hospitals, according to emailing lists for HA055. Centinela CEO Michael Rembis and Daniel Freeman CEO Harris Koenig appear on those lists. Both Rembis and Koenig previously served as operating chiefs at Alvarado Hospital Medical Center, a Tenet-owned facility facing criminal charges for allegedly paying illegal kickbacks to physicians, mostly in the 1990s.

But a nonprofit organization is competing with HA005 to gain control of one of the Los Angeles hospitals. We CAHRE, which stands for Community Action for Healthcare Reform and Education, has offered to buy the same Daniel Freeman Marina Hospital that its members successfully battled to keep open after Tenet attempted to shut it down and sell it to developers two years ago.

Cindy Miscikowski, the city council representative for the district where Marina is located, is among the many politicians who are closely monitoring the Tenet sales in an effort to ensure that critical health care services continue. And Bill Rosendahl, a candidate running for the seat Miscikowski will soon vacate, has already pledged to support only those buyers who plan to operate Marina as a hospital.

Rosendahl believes the nation is engulfed in a health care crisis that is particularly serious in the Los Angeles area where Tenet has become dominant. He insists that he will battle against any efforts to shut down yet another hospital in the region. For example, he points out, Marina is already protected by zoning restrictions -- requiring it to operate as a hospital -- that he intends to keep in place.

"My position is this: Marina is a hospital that must stay as a hospital -- period," Rosendahl told TheStreet.com last week. "I can say that if anybody has other ideas ... I am going to oppose them."

Rosendahl is hardly alone. The Coalition of Quality Healthcare, which counts Consumers Union and the Community Health Council among its members, has laid out a series of suggested restrictions for the Tenet hospitals currently up for sale.

"This large-scale divestment of Tenet's vast holdings leaves no community untouched," the Los Angeles group says. "The coalition is working to ensure that the sales of the Tenet hospitals in Los Angeles and Orange Counties -- the largest divestment of this nature in California's history -- are conducted within a public process with input and consultation with the affected communities, and that responsible ownership and community participation can ensure that these transactions proceed smoothly and do not result in diminished health care resources."

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