Tenet seen still in play, even after lawsuit

By Susan Kelly

CHICAGO (Reuters) - Tenet Healthcare Corp <THC.N> shares retained a takeover premium on Tuesday, a day after it lobbed a legal grenade at unwanted suitor Community Health Systems <CYH.N>, suggesting that investors still believe a deal between the two rivals could happen.

Tenet on Monday filed an explosive lawsuit against Community Health, accusing the No. 2 U.S. hospital operator of inflating patient admissions and overbilling the Medicare program and other payers to boost revenue and profit. Community Health has denied the charges.

The unusual accusations damaged shares of both companies, with Community Health plunging 36 percent and Tenet sinking 15 percent, as investors assessed that Tenet's analysis of its rival's admissions practices would not be easy to dismiss and could trigger a government probe.

Shares of Tenet, the No. 3 hospital operator, closed at $6.56 on Tuesday, still well above Community Health's November offer of $6 a share.

Community Health shares also rebounded, recovering 21.6 percent to close at $31.48 as some analysts said the company would weather the charges.

Community Health's $3.3 billion takeover offer, which Tenet's board rejected in December as "opportunistic" and "inadequate," represented a 40 percent premium to Tenet's share price at the time.

"If investors believed that Tenet definitively killed the deal, then (the stock) should be back to $4 in theory," said Jessica Bemer, analyst with Snow Capital Management. "That's probably the biggest issue for everyone at this point: 'What happens next to the deal?'"

No. 1 hospital chain HCA Holdings <HCA.N> may be the only hospital operator, besides Community Health, with the resources to launch a competing bid for Tenet, some analysts have suggested. Others mention private equity as a possible white knight.

Analysts stressed that investors need more answers about Tenet's charges before understanding how they might affect the deal and the hospital industry as a whole.

Marek Ciszewski, senior equity analyst for Harris Private Bank, said Community Health's bankers likely remain committed to providing funding for the deal, but he doubted Tenet shareholders would approve it.

"I don't see how this deal can close, given the huge uncertainty, and most importantly the huge liability, if the allegations are correct and the numbers Tenet gave are true," Ciszewski said.

Community Health on Monday said it remains committed to buying Tenet. A spokeswoman said the company had no further comment on Tuesday.

The onus is now on Community Health to address Tenet's charges and explain why it still wants to buy the uncooperative target, Bemer said.

"This is somewhat unprecedented in the world of public companies. Who knew it could get this ugly?" said Bemer, whose firm owns shares of Community Health, LifePoint Hospitals <LPNT.O> and Health Management Associates <HMA.N>.

"The problem here is that you have people really digging their heels in on both sides," Bemer said. "You have a bunch of investment bankers trying to bring them to the table, and obviously it's not working."

Tenet has adopted a shareholder rights plan as a roadblock to the deal and set the date of its annual meeting for November 3, later in the year than usual. Community Health has said it will put forth a slate of board candidates at the annual meeting.

With some of the takeover premium removed from the shares, Tenet becomes more attractive to other would-be acquirers, said CRT Capital Group analyst Sheryl Skolnick. "The deal isn't dead until Community withdraws its offer," she said.

Caris & Co analyst Ann Hynes said the lawsuit could bring new bidders to the table for Tenet.

"We think other potential suitors abstained from bidding due to the perception that Community Health could afford to increase its bid up to an estimated $8.50 range and still maintain a debt/EBITDA within its historic range," Hynes wrote in a note to clients.

If the government decides to investigate Tenet's claims, Community Health would be unlikely to continue to pursue its unsolicited bid for Tenet, opening the door for new bidders to step in, Hynes said.

(Editing by Steve Orlofsky)