Is Community Health The Right Prescription For Tenet?

Community Health (NYSE:CYH) is taking a time-tested route in its efforts to seal a deal to acquire fellow hospital operator Tenet Healthcare (NYSE:THC) - if you cannot get the other company's board of directors to say "yes," take the negotiations public and hope that your target's shareholders force the matter. While Tenet's arguments for rejecting the deal are not without merit, the 50% jump in Tenet's stock price suggest that shareholders would like a deal and expect an improved offer to come. 

The Deal That Community Health Wants
Community Health, an operator of 126 hospitals in largely suburban areas or small communities, is offering a $7.3 billion deal to Tenet shareholders, including an equity offer of $3.3 billion. In addition to taking on Tenet's substantial debt, CYH would give Tenet shareholders $6 per share in consideration for their shares - $5 in cash and $1 in CYH stock. That deal would have represented a 40% premium for THC shares. (For more, see Mergers And Acquisitions: Understanding Takeovers.)

All in, this would create a hospital operator with 176 locations in 30 states. In contrast to CYH, Tenet operates mostly in urban areas, so there would not be all that much overlap between the two companies. Moreover, this would create the largest hospital operator in the country, surpassing once-public HCA and its 163 hospitals across 20 states. It would also create a highly-leveraged company, with upwards of $15 billion in debt being serviced by less than $3 billion in EBITDA.


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A Little More On Santander And M&T Bank

Just a quick little follow-up on the rumor of a get-together between Spain's Santander (NYSE: SAN) and super-regional M&T Bank (NYSE: MTB).

There was news a couple of days ago that Santander was looking to restart talks with M&T management about the possibility of a deal. If the news reports are accurate, the problem is pretty fundamental - M&T does not want to sell and/or give up control to Santander. Given the history of the M&T, the long tenure of senior management, the significant employee ownership, and the whole culture of the bank (as best an outsider like myself can sense), this is not really a surprise.

In other words, Santander is probably welcome to buy Allied Irish Bank's (NYSE: AIB) stake in M&T, but Santander will be expected to operate under similar strictures as AIB - namely, can you offer some suggestions and we won't dilute your interests, but we're not interested in being your subsidiary.

If Santander pushes the matter, they likely will fail. About 20% of M&T is owned by employees, another 5% by Berkshire Hathaway (NYSE: BRK-A), and the 22% or so held by AIB. Assuming AIB has the option to side with M&T management, it is pretty much a non-starter for Santander, and I have to imagine that AIB has other options to monetize their stake if they really wish to pursue them (in other words, I don't think AIB turns over on M&T to make a buck).

I still think Santander is a decent suitor at the right price; I don't think they will ruin M&T and I think there's a fair chance that they would put M&T at the head of their US operations (maybe to the detriment of US-based, Santander-owned Sovereign Bancorp). All in all, Santander is a very good bank and while it may not have quite the same culture as M&T, Santander's relative conservatism has helped them muddle through this credit crisis better than most.

What if the deal doesn't happen? M&T will pretty much continue on as before, growing at a modest organic pace and perhaps considering strategic deals here and there. Santander, though, is not likely to quit. Whether they would look to go large (say, Suntrust (NYSE: STI) or PNC (NYSE: PNC)) or more moderate (deals the size of Fifth Third (Nasdaq: FITB) or Comerica (NYSE: CMA), for instance), I don't think Santander is done building its U.S. business just yet.