What happened
Shares of Tenet Healthcare (THC 3.17%), a giant hospital operator, popped after the company said it was going to spin off a payment processor. Investors would have preferred a direct sale, but a spinoff was good enough to drive the stock 14.5% higher on Wednesday.
So what
Despite today's gain, Tenet Healthcare stock has fallen 48.3% over the past year because the company's $15.8 billion of long-term debt and slowly sinking revenue has applied lots of pressure on the hospital operator. For years, Tenet has tried to find a buyer for its billing and payment processing subsidiary, Conifer. Since Tenet can't get one of its peers to buy Conifer, the company has decided to sell its shares to investors.
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Tenet's revenue cycle management business isn't exactly experiencing a golden age. Second-quarter revenue from the Conifer segment fell 13%, compared to the previous-year period. With revenue coming in at an annualized rate of $1.4 billion, the company leans on the Conifer segment for just 8% of total revenue and 16% of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), both of which have been sliding slowly downhill.
Now what
Spinoffs that get lots of attention tend to work out well for investors, but this one won't lead to gains if Conifer's business doesn't return to growth. That means the company may need to sell off its 76.2% stake in Conifer at fire-sale prices that won't allow it to pay off its heavy debt load, $4.2 billion of which is due in 2020 and 2021.
The company doesn't plan on completing the spinoff until the second quarter of 2021. Revenue across the board has been sliding since 2016. If sales don't reverse course soon, Tenet's debt load could squeeze the company into a corner from which it can't escape.
