Markets Hammer Tenet Stock Over Healthscope Merger Talks
Recently, there was buzz of another interesting possible suitor: Tenet Healthcare (THC). Because of the volatility in Tenet's stock, the company actually had no choice but to disclose that there were indeed deal talks. In fact, the press release goes into lots of depth about the benefits to Tenet of buying Healthscope.
However, investors are extremely skeptical. In Tuesday's trading, Tenet shares plunged 17%.
Healthy Growth Likely for Healthscope
Founded in 1994, Healthscope operates 43 hospitals that account for roughly 15% of Australia's private hospital market. The company also has the country's third-largest pathology business, with additional facilities in New Zealand, Singapore and Malaysia.
And Healthscope should benefit nicely from some key trends. Australia has a growing economy and population, which enjoys universal access to health care. In other words, there are likely to be continued increases in hospital expenditures over the long haul. In fact, while over 40% of the Australian population is covered by private health insurance, this is likely to increase over time.
Healthscope posted a 11.1% increase in revenue growth last year, and showed an attractive EBITDA margin of 13.8%.
So, if Tenet does wind up purchasing Healthscope, it should provide the company with improved growth rates as well as a better payer mix and profit margins.
A Good or Bad Idea for Tenet?
In the hospital sector, mergers and acquisitions are common strategies. After all, there are many cost synergies as a chain gets larger. And for the most part, Healthscope is a prime target, as is evident from the intense interest it's getting from top-tier private-equity operators.
So why the concern about Tenet making a play for Healthscope? First, it's far from easy to pull off a long-distance global acquisition. The logistics are complicated and expensive, and there are different regulations and market dynamics to account for. And, in light of its valuation, Tenet would probably need to raise debt to finance the deal.
Interestingly enough, Tenet has been in the process of revving things up again and should benefit from the Obama health care plan. It might make more sense for the company to focus on the U.S. market instead.
So far, the buyout discussions are in the preliminary phase. And given the market's reaction, Tenet may have little choice but to forgo this deal.