Why Tenet Healthcare and Vanguard Health Systems Shares Soared

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of acute care and specialty hospital operators Vanguard Health Systems (NYSE: VHS  ) and Tenet Healthcare (NYSE: THC  ) vaulted higher by as much as 70% and 10%, respectively, after Tenet announced a deal to buy Vanguard Health Systems.

So what: Under the terms of the deal, Tenet Healthcare will acquire Vanguard Health for $1.8 billion, or $21 per share, while also assuming its $2.5 billion in net debt. Tenet has arranged financing through Bank of America/Merrill Lynch and plans to refinance Vanguard Health's debt to a lower interest rate once the deal is complete. The impetus behind the move for Tenet is that it'll move the hospital operator into new markets and greatly expand its hospital revenue management segment as we enter the final months before the full implementation of the Patient Protection and Affordable Care Act, also known as Obamacare.

Now what: I'd certainly say that Vanguard Health Systems shareholders are walking away like bandits with a 70% premium on a hospital stock that I already considered to be possibly the most overvalued of the bunch. While I understand Tenet's reasoning behind the move and the urge to expand prior to Obamacare's full implementation, my concern grows as it takes on more debt to pay out a hefty premium -- 25 times forward earnings -- for Vanguard Health. There's little doubt in my mind hospital operators will benefit from a reduction in doubtful accounts due to the individual mandate portion of the PPACA, but I'm not certain I feel as strongly about this deal as investors do. I would suggest hitting the sidelines for a few quarters and letting the inevitable "merger hiccups" run their course.

Craving more input? Start by adding Vanguard Health Systems and Tenet Healthcare to your free and personalized watchlist so you can keep up on the latest news with the company.

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