Sunday, December 21, 2014

Is Drexel's Fry key to hospital merger plan?

In the hostile takeover attempt against Tenet Healthcare, Drexel President John Fry sits on the would-be buyer's board - while he's also a Tenet partner through Drexel's role at Hahnemann and Childrens' hospitals

Is Drexel's Fry key to hospital merger plan?

So far, it's been a hostile romance. But "ultimately, Community Health Systems will acquire Tenet Healthcare Corp.," paying more or less the same $3.3 billion, or $7 a share, that it offered, and Tenet rejected, earlier this month, predicts Gary Lieberman, stock analyst for Wells Fargo Securities in New York, in a report to clients  yesterday.

A prominent Philadelphian has a role on each side of this potential deal: 

Drexel University President John Fry has been a director of Nashville-based Community Health since 2004, when he was president of Lancaster's Franklin and Marshall College.

And, as head of Drexel, Fry also has leverage with Texas-based  Tenet, since Drexel's College of Medicine has an "academic affiliation agreement" with Tenet's two Philadelphia hospitals, Hahnemann University Hospital and St. Christopher's Hospital for Children. Both are staffed by Drexel doctors and serve as the university's "primary teaching hospitals in Philadelphia," as Drexel spokeswoman Niki Gianakaris put it.

Community Health is the nation's largest hospital chain, with 127 hospitals. Locally that includes Chestnut Hill Hospital in Philadelphia, the Brandywine, Phoenixville and Jennersville Memorial regional hospitals in Chester County, Pottstown Memorial Medical Center, and Memorial Hospital of Salem County, N.J. Chestnut Hill is affiliated with the Penn medical system, a Drexel rival, as my colleague Stacey Burling notes here.

What happens to Drexel and Tenet's big Philadelphia hospitals if Tenet becomes part of a much larger company? "It's premature to speculate," said Gianakaris.

But, since Fry remains on the Community board despite Tenet's opposition to the offer, it's easy to speculate he supports, or could live with, the deal.

Why merge, with all the expense and dislocation? President Obama's Medicaid expansion and healthcare reforms will boost spending on hospitals, potentially making the business more profitable -- and Community could cut as much as $400 million in yearly spending out of Tenet's $9 billion annual budget, by eliminating thousands of headquarters and back-office jobs, Susquehanna International Group analyst AJ Rice wrote in a report to clients this week.

Also, if Community buys Tenet and its 50 hospitals, the local Community sites and their doctor and lab networks gain negotiating clout against Independence Blue Cross and other big insurers who set reimbursement rates. And the suburban hospitals could become a more reliable source of patients for Hahnemann and St. Chris specialists.

Though the offer boosted Tenet stock more than 30%, Tenet says it should be worth a lot more. Community has threatened to try and take over Tenet's board if Tenet bosses don't surrender.

Analyst Rice at Susquehanna expects Tenet to seek rival bidders, and he expects "considerable interest among private equity firms" in buying Tenet at a higher price.

But analyst Lieberman at Wells Fargo says it's "unlikely that another bidder is willing to pay" as much as Community has already offered. Citing company data, he wrote that Tenet is less profitable than Community and other large chains, and it's been losing profitable commercial-insurance customers for six straight years. Tenet has stepped up capital spending to make up for inadequate investment in the past, but generally "Tenet's trends are particularly weak."

Lieberman also notes that rival chains are already digesting big acquisitions, or can buy individual hospitals on the cheap. "A private equity firm could get involved, but we believe there are more attractive" healthcare deals than buying chains like Tenet - and private investors can't consolidate operations and cut costs the way a bigger chain like Community can.

 

Joseph N. DiStefano
About this blog

PhillyDeals posts raw drafts and updates of Joseph N. DiStefano's columns and stories about Philly-area finance, investment, commercial real estate, tech, hiring and public spending, which he's been writing since 1989, mostly for the Philadelphia Inquirer.

DiStefano studied economics, history and a little engineering at Penn, taught writing at St. Joe's, and has written the book Comcasted, more than a thousand columns, and thousands of articles, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano
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