Tenet Healthcare Said To Be Exploring Sale: How Far Is Management Willing To Go?

Shares of Tenet Healthcare Corp (NYSE: THC) were trading higher by nearly 3 percent after Thursday's opening bell in reaction to reports that the company is exploring strategic alternatives, including a potential sale of itself.

However, investors holding on to Tenet's stock under the assumption the company will be bought out at a notable premium may need to reconsider, at least according to KeyBanc Capital Markets' Jason Gurda.

It is "unlikely" that Tenet Healthcare will sell itself given a high level of debt and lack of interest among potential strategic buyers, Gurda commented in a research report (see his track record here). At a $16 billion enterprise valuation, there are few companies that can even afford the price tag for a slow growth hospital company with possible exceptions being HCA Healthcare Inc (NYSE: HCA) and maybe Universal Health Services, Inc. (NYSE: UHS).

However, HCA's M&A activity has historically focused on expanding in specific geographic regions and buying Tenet Healthcare would result in a significant overlap in several markets, the analyst noted. Also, Universal Health Services may not have an appetite for new M&A deals after adding new debt to its balance sheet.

But what Tenet Healthcare could reasonably oversee to create value for investors is divesting individual hospitals and/or its Conifer subsidiary. Either action would be accretive to Tenet Healthcare's stock and accelerate de-leveraging.

However, it is unclear at this point "how far management is willing to go in breaking up the business."

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