Tenet plans to spin off revenue-cycle subsidiary Conifer

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After nearly two years of fielding underwhelming offers for its revenue-cycle subsidiary, Tenet Healthcare Corp. has settled on a decidedly different maneuver: It will spin it off as a separate, publicly-traded company.

Leaders with Dallas-based Tenet have spent the past 18 months finalizing a deal on Conifer Health Solutions. While CEO Ron Rittenmeyer conceded on an investor call Wednesday that an outright sale would have been the company’s first choice, there are several benefits to a tax-free spin off.

Shareholders win in that they’ll get shares in the new company in addition to their Tenet stock, but Rittenmeyer couldn’t say say yet how many they will receive.

“From a shareholder standpoint, I believe it’s a no-brainer,” he said.

The stock market responded positively to Wednesday’s news. Tenet’s shares were up about 14.5% at market close.

Rittenmeyer said the deal, which isn’t scheduled to close for another two years, is also the best path forward for Tenet in that it will have a “reasonable” impact on the company’s debt. Tenet’s long-term debt stood at $14.8 billion as of March 31. He characterized the deal as a “debt-for-debt exchange” that will be tax free. Tenet also would have had to pay taxes on a sale.

The aim of Tenet’s asset sales, including—hypothetically—Conifer, have been to lower the company’s debt. But analysts questioned how much spinning off Conifer will truly achieve that purpose, and some said they believe it could actually increase the company’s debt ratio.

Rittenmeyer said in an interview Tenet has long maintained it will bring down debt through a combination of performance and asset sales, which are ongoing.

“The spin-off will be a debt-to-debt exchange that will put debt on the new company and pay off debt at Tenet,” he said. “So our debt will come down by that process.”

Tenet won’t disclose how much of its debt will shift to Conifer until 6 months before the deal closes, Rittenmeyer told investors on Wednesday morning’s call. He wouldn’t say whether Conifer will have more, less or similar leverage to Tenet. One thing’s for sure, he said Tenet does not plan to overleverage the new company.

“There’s no way we plan to load up Conifer and cause that to have a capital structure problem on the way out,” Rittenmeyer said. “We want it to be successful, so it’s a balancing act.”

Others aren’t convinced that will be the case. Brian Tanquilut, a healthcare equity analyst with Jefferies, thinks the deal will actually increase Tenet’s debt ratio because Conifer’s departure from Tenet will pull more from its earnings than it will from its debt, he said.

“There will be more debt sitting on Tenet’s books than what you’re moving off earnings proportionally to the Conifer spin,” he said.

John Ransom, a managing director in healthcare equity research with Raymond James & Associates, agreed that the deal could nudge Tenet’s debt ratio higher depending on how it plays out, although Conifer will likely pay a dividend to Tenet.

It makes sense that Tenet doesn’t want to load up the new company with debt, Ransom said.

“I think they want to try to dress this up as more of a growth company,” he said.

The deal won’t close until the end of the second quarter of 2021. To get there, Tenet will have to meet regulatory approvals from the Internal Revenue Service and Securities and Exchange Commission, Rittenmeyer said.

Tenet also announced Wednesday the departure of Conifer’s CEO, Stephen Mooney. He will be replaced on an interim basis by Tenet’s Chief Operating Officer, Kyle Burtnett, while the company searches for a permanent replacement. Rittenmeyer said that wasn’t connected to the Conifer announcement, but that Mooney simply wanted to pursue other endeavors.

“It’s very positive; no negative,” Rittenmeyer said. “We’re not pushing him out the door.”

In February, Tenet was in exclusive talks over what would have been a very different Conifer deal. Rittenmeyer revealed Wednesday Tenet had considered a merger with another company that would have ultimately been spun out. He said Tenet decided against that because it wasn’t clear that plan would have yielded enough of a financial return.

Tenet received nine preliminary bids to purchase Conifer, including three that were high enough to consider, Rittenmeyer said. Tenet spoke with 74 potential buyers overall, including 16 strategic buyers and 58 financial buyers. However, the company encountered a number of setbacks when it came to those deals.

Some of the would-be buyers were offering company stock in addition to cash, but Tenet wanted an all-cash sale, Rittenmeyer said. Additionally, he said the bids were not high enough to reflect the performance improvements Tenet has added to Conifer.

A number of the bids included stipulations Tenet could not agree to, such as not being accountable for collecting 100% of Tenet’s cash, “which is critically important to us,” Rittenmeyer said. In the end, none of the proposals would have assured Tenet would have effective recourse if cash collection fell short, Rittenmeyer said.

Some would-be buyers expected Tenet to guarantee that if it sold a hospital, the buyer would continue to use Conifer or, if it didn’t, Tenet would pay Conifer’s new owner for the sold asset’s revenue-cycle management, Rittenmeyer said.

This deal was complicated by the fact that Tenet continues to divest hospitals to pay down its debt, Tanquilut said. Since Tenet is Conifer’s largest customer, buyers would be taking on a shrinking company, he said.

“How do you value an asset that we know at least for its largest client will see shrinking revenue?” Tanquilut said.

On Wednesday’s call, Rittenmeyer said early in the process, shareholders said they believed buyers would pay high multiples for Conifer, possibly in the mid- to high-teens.

Ransom said Tenet likely received an unreasonably high valuation from an investment bank, which may have contributed to the extended time it spent seeking a buyer.

“Whoever told them they were going to get a high-teens valuation, that’s insane,” Ransom said. “They probably shouldn’t have bought that.”