Psychiatric Solutions (PSYS) Downgraded After Deal Announced

Citi Investment Research & Analysis analyst Gary Taylor downgraded his rating for shares of Psychiatric Solutions, Inc. (Nasdaq: PSYS) to Hold, while raising his price target to $33.75 per share, from the previous price target of $25.

Taylor raised his price target to the announced price that Universal Health Services, Inc (NYSE: UHS) said it would pay to acquire Psychiatric Solutions, Inc.

The analyst said that the current 4% implied return is not high enough to justify a Buy rating for fundamental investors because of the possibility that the deal could collapse, and with it Universal Health Services' share price.

The Citi Investment Research & Analysis analyst wrote, "risk of closing — seems small as well, although the $72m breakup fee is probably little impediment if UHS chose to back-away. However, we believe UHS already had a fair sense of PSYS assets and operations even before the recent diligence period. PSYS' numerous patient safety regulatory issues are well-documented and UHS had 6-weeks to contemplate the recent DOJ subpoena of PSYS. Committed bank financing is in place. Finally, we believe the FTC will broadly define the IP psych market (of which freestanding only represents 20% of total capacity), avoiding a challenge. UHS expects a 4Q10 closing, which seems reasonable to us."