UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report: June 24, 2013

(Date of earliest event reported)

 

 

TENET HEALTHCARE CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

Nevada   1-7293   95-2557091
(State of Incorporation)  

(Commission

File Number)

 

(IRS Employer

Identification Number)

1445 Ross Avenue, Suite 1400

Dallas, Texas 75202

(Address of principal executive offices, including zip code)

(469) 893-2200

(Registrant’s telephone number, including area code)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


Item 7.01 Regulation FD Disclosure.

On June 24, 2013, Tenet Healthcare Corporation (the “Company”) announced the execution of a definitive agreement to acquire Vanguard Health Systems, Inc. (“Vanguard”) for $21.00 per share, without interest, in an all cash transaction. The Company and Vanguard issued a joint press release announcing the execution the definitive agreement, a copy of which is attached hereto as Exhibit 99.1 and is incorporated herein by reference. Additionally, on June 24, 2013, the Company disseminated an investor presentation to be used in connection with a conference call to be held with investors discussing the proposed transaction. A copy of the investor presentation is attached hereto as Exhibit 99.2 and a copy of the script for the conference call is attached hereto as Exhibit 99.3, each of which is incorporated herein by reference.

Forward-Looking Statements

Certain statements in this document are “forward-looking statements” under Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on current expectations. However, actual results may differ materially from expectations due to the risks, uncertainties and other factors that affect our business and Vanguard’s business. These factors include, among others, the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; the failure to satisfy conditions to completion of the merger, including receipt of regulatory approvals; changes in the business or operating prospects of Vanguard; changes in health care and other laws and regulations; economic conditions; adverse litigation or regulatory developments; competition; our success in implementing our business development plans and integrating newly acquired assets; our ability to hire and retain health care professionals; our ability to meet our capital needs, including our ability to manage our indebtedness; and our ability to grow our Conifer Health Solutions business segment. We and Vanguard provide additional information about these and other factors in the reports filed with the Securities and Exchange Commission, including, but not limited to, those described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our and Vanguard’s annual reports on Form 10-K for the year ended December 31, 2012 and June 30, 2012, respectively. We disclaim any obligation to update any forward-looking statement in this document, whether as a result of changes in underlying factors, new information, future events or otherwise.

 

Item 9.01 Financial Statements and Exhibits.

 

  (d) The following exhibits are filed as a part of this Report.

 

Exhibit
No.

  

Description

99.1    Joint press release dated as of June 24, 2013
99.2    Investor presentation slides
99.3    Investor conference call script


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

    TENET HEALTHCARE CORPORATION
Date: June 24, 2013      
    By:  

/s/ Paul A. Castanon

    Name:   Paul A. Castanon
    Title:  

Vice President, Deputy General Counsel and

Corporate Secretary


EXHIBIT INDEX

 

Exhibit
No.

  

Description

99.1    Joint press release dated as of June 24, 2013
99.2    Investor presentation slides
99.3    Investor conference call script

EX-99.1

Exhibit 99.1

 

LOGO

News Release

Tenet to Acquire Vanguard Health Systems for $21 per share in Cash

Expands Tenet’s Total Ownership to 79 Hospitals and 157 Outpatient Facilities

Diversifies Geographic Footprint to 16 States, Including Two New Markets in Texas

Increases Expected Benefit from Affordable Care Act

Builds Conifer’s Position in Fast-Growing Business Services Sector

Creates $100 Million-$200 Million in Expected Annual Synergies

DALLAS and NASHVILLE – June 24, 2013 – Tenet Healthcare Corporation (NYSE:THC) and Vanguard Health Systems, Inc. (NYSE:VHS) have signed a definitive agreement whereby Tenet will acquire Vanguard for $21 per share in an all cash transaction. The acquisition is valued at $4.3 billion including the assumption of $2.5 billion in Vanguard debt. Tenet expects the transaction to be accretive to earnings in the first year. Anticipated annual synergies are $100 million to $200 million. Both Boards of Directors have unanimously approved the transaction and Tenet has secured fully committed financing from Bank of America Merrill Lynch.

“This unique strategic transaction will bring together organizations that share a common commitment to providing high quality care and create significant new growth prospects for Tenet,” said Trevor Fetter, president and chief executive officer, Tenet. “This acquisition will take Tenet into new geographic markets, expand the breadth of our service offerings, diversify our earnings sources and increase the benefits we expect to realize under healthcare reform. This acquisition will also include a substantial contribution from the application of Conifer’s capabilities to Vanguard’s operations. We expect additional financial contributions to come from supply costs savings and labor management efficiencies.”

The acquisition, which is expected to close before the end of 2013, is subject to customary closing conditions and regulatory approvals. Upon closing, Charlie Martin, Vanguard’s founder, chairman and chief executive officer, will join Tenet’s Board of Directors. Keith Pitts, Vanguard’s vice chairman, will join the Tenet senior management team as vice chairman.

Fetter added, “Tenet’s board and I are delighted that Charlie and Keith will be joining Tenet. They are experienced healthcare executives for whom we have great respect. We hope to retain other members of Vanguard’s management team and look forward to engaging with them now that the acquisition has been announced.”

Martin said, “This combination will establish a much larger, stronger, and flexible industry-leading healthcare organization. The cultures of our two companies are a great fit and we share a vision of creating a better health and healthcare system that will lead us through the coming changes. Our leaders and operators are innovative and forward-thinking, and certainly an attractive complement to the Tenet management team. Together, we now have the scale and strength to achieve the vision we have pursued in parallel.”

Fetter concluded: “We also believe that a combination with Vanguard will open an important new avenue of growth among not-for-profit health systems where Vanguard has built a tremendous reputation for being a creative strategic partner. We look forward to building on that impressive track record. At this time of unprecedented change in healthcare, we believe that the combined company will be well-positioned to lead the transformation.”


Gibson Dunn & Crutcher served as Tenet’s legal counsel and Lazard acted as lead financial and strategic advisor. Bank of America Merrill Lynch, Barclays and Teneo Capital also served as advisors for Tenet. Skadden, Arps, Slate, Meagher & Flom served as Vanguard’s legal counsel and JP Morgan acted as exclusive financial and strategic advisor.

Management Webcast

Tenet management will discuss the Vanguard acquisition on an 8:30 a.m. (ET) webcast this morning, June 24, 2013. A set of slides which will be referred to on this webcast will be posted to the Tenet website prior to the call. This webcast may be accessed through Tenet’s website at www.tenethealth.com/investors.

Tenet Healthcare Corporation, a leading health care services company, through its subsidiaries operates 49 hospitals, 126 free-standing outpatient centers and Conifer Health Solutions, a leader in business process solutions for health care providers that serves over 600 hospital and other clients nationwide. Tenet’s hospitals and related health care facilities are committed to providing high quality care to patients in the communities they serve. For more information, please visit www.tenethealth.com.

Vanguard Health Systems (www.vanguardhealth.com) owns and operates 28 acute care and specialty hospitals and complementary facilities and services in metropolitan Chicago, Illinois; metropolitan Phoenix, Arizona; metropolitan Detroit, Michigan; San Antonio, Texas; Harlingen and Brownsville, Texas; and Worcester and metropolitan Boston, Massachusetts. The company’s strategy is to develop locally branded, comprehensive health care delivery networks in urban and suburban markets.

 

Tenet Healthcare Corporation      

Media:

 

Steven Campanini (469) 893-2247

steven.campanini@tenethealth.com

   Investors:   

Thomas Rice (469) 893-2522

thomas.Rice@tenethealth.com

Vanguard Health Systems      

Media:

 

Trip Pilgrim (615) 665-6151

tpilgrim@vanguardhealth.com

   Investors:   

Gary Willis (615) 665-6098

gwillis@vanguardhealth.com

# # #

This press release contains certain “forward-looking statements” under Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on current expectations. However, actual results may differ materially from expectations due to the risks, uncertainties and other factors that affect Tenet Healthcare Corporation’s (“Tenet”) business and Vanguard Health Systems, Inc.’s (“Vanguard”) business. These factors include, among others, the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; the failure to satisfy conditions to completion of the merger, including receipt of regulatory approvals; changes in the business or operating prospects of Tenet or Vanguard; changes in health care and other laws and regulations; economic conditions; adverse litigation or regulatory developments; competition; success in implementing business development plans and integrating newly acquired assets; the ability to hire and retain health care professionals; the ability to meet capital needs, including the ability to manage indebtedness; and Tenet’s ability to grow its Conifer Health Solutions business segment. Tenet and Vanguard provide additional information about these and other factors in the reports filed with the Securities and Exchange Commission, including, but not limited to, those described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Tenet’s and Vanguard’s annual reports on Form 10-K for the year ended December 31, 2012 and June 30, 2012, respectively.


Tenet and Vanguard disclaim any obligation to update any forward-looking statement in this press release, whether as a result of changes in underlying factors, new information, future events or otherwise.

Tenet uses its company web site to provide important information to investors about the company including

the posting of important announcements regarding financial performance and corporate developments.


EX-99.2
Acquisition of
Vanguard Health Systems
A New Company for a New Healthcare Environment
June 24, 2013
Exhibit 99.2


Disclosures / Forward-Looking Statements
1
Our presentation includes certain financial measures such as Adjusted EBITDA, which are not calculated in accordance
with generally accepted accounting principles (GAAP). Reconciliation between non-GAAP measures and related GAAP
measures can be found at the end of this presentation.
Non-GAAP Information
Certain statements in our presentation are “forward-looking statements” under Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on current expectations. However,
actual results may differ materially from expectations due to the risks, uncertainties and other factors that affect our business and
Vanguard Health Systems' (“Vanguard”) business. These factors include, among others, the occurrence of any event, change or
other circumstances that could give rise to the termination of the merger agreement; the failure to satisfy conditions to completion
of the merger, including receipt of regulatory approvals; changes in the business or operating prospects of Vanguard; changes in
health care and other laws and regulations; economic conditions; adverse litigation or regulatory developments; competition; our
success in implementing our business development plans and integrating newly acquired assets; our ability to hire and retain
health care professionals; our ability to meet our capital needs, including our ability to manage our indebtedness; and our ability to
grow our Conifer Health Solutions business segment (“Conifer”). We and Vanguard provide additional information about these and
other factors in the reports filed with the Securities and Exchange Commission, including, but not limited to, those described in
“Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our and
Vanguard’s annual reports on Form 10-K for the year ended December 31, 2012 and June 30, 2012, respectively. We disclaim any
obligation to update any forward-looking statement in this presentation, whether as a result of changes in underlying factors, new
information, future events or otherwise. 


Acquisition Highlights
Tenet
acquiring
Vanguard
for
$21
cash
per
share,
or
an
aggregate
of
$4.3
billion
(a)
Unanimously approved by both Boards of Directors
Accretive to Tenet’s earnings in year one
$100-200
million
in
annual
synergies
expected
revenue
cycle
management
efficiency
and
improvement,
overhead
reduction,
and
supply
chain
management
and
other
operating improvement
Ed Kangas, Non-Executive Chairman of Tenet, to continue as Non-Executive
Chairman; Charlie Martin, Vanguard CEO, to join Tenet board
Trevor Fetter to continue as President and CEO; Keith Pitts, Vice Chairman of
Vanguard, to join Tenet as Vice Chairman
Tenet intends to complete existing share repurchase program in 2013
Leverage ratio projected to return to 4.75x-5.0x by year end 2014
Expected to close by year end 2013
2
(a) 
Includes $2.5 billion in Vanguard debt


3
Well-Positioned for the New Healthcare
Environment
79 hospitals and 157 outpatient centers
Applies proven cost management, quality improvement, care integration and
network development strategies across a broader platform
Enhances portfolio management opportunities
Increased 
Scale
Expands
market
leader
position
#1
or
#2
position
in
19
important
markets
Adds geographic diversification with expansion into additional states
Adds
important
markets
in
Texas
San
Antonio
and
South
Texas
Enhanced
Geographic
Breadth
Physician alignment, recruitment and employment strategies applied across
broader network
Leverages Vanguard’s health plan experience developing successful clinical
integration and ACO models
Broader
Physician
Platform
Leverages Conifer Health Solutions across broader portfolio
Adding
Vanguard
health
plan
expertise
expands
Conifer
value-based
care
and
population health management capabilities
Integrated
Service
Offering
Combines two organizations with similar values, priorities and demonstrated
cultures of ethics and compliance
Tenet’s proven management capabilities augmented by Vanguard turnaround
expertise and experience in health plan operations
Complementary
Management
Teams


4
Successful track record
of generating growth by
acquisition and strategic
Vanguard
Tenet
Hard-wired culture
of ethics and
compliance
High quality clinical
operations
Industry-leading
quality and safety
programs
Complementary Operational Strengths and
Shared Values
Successful track record of
generating organic growth
Systematic approach to cost
management (Performance
Excellence Program)
Excellent centralized managed
care contracting and outpatient
development strategies
Highly technology-enabled
and scalable revenue
cycle operation
Innovative approaches to
cost management
Expertise in health plan
operations and innovative
payment models
Experienced in not-for-profit
partnerships and turn-
around management
partnerships


Established Positions in Key Markets
Greater Breadth Provides Opportunities for Revenue Growth
(a)
Excludes 2 Connecticut hospitals currently under LOI
5


6
Complements established Tenet positions in El Paso,
Houston, Nacogdoches and Dallas
Both new markets demonstrate underlying population
growth
Vanguard showing strong organic growth in its own
operations/market share
San Antonio
#2 system in Texas' 3rd largest market
Opportunities for additional growth
Harlingen / Brownsville
Opportunities for further earnings improvement in
strong market
Pro forma revenue doubles from $1.5B to $3.0B
Vanguard’s health plan and ACE pilot program provide
platform for innovative contracting models
Positioned for significant upside from ACA
Current Tenet market
Current Vanguard market
Adds Important New Markets in Texas
(b)
Includes 3 freestanding OP facilities recently acquired by Tenet
(a)
Includes 2 Vanguard hospitals under development
San Antonio
7 Hospitals
(a)
13 OP Centers
(b)
Houston
3 Hospitals
15 OP Centers
El Paso
3 Hospitals
8 OP Centers
Nacogdoches
1 Hospital
2 OP Centers
Harlingen/
Brownsville
2 Hospitals
1 OP Center
Dallas
3 Hospitals
8 OP Centers


Medicare and Medicaid Covered Lives
(Projected Growth: 2013-2017)
San Antonio
Chicago
Massachusetts
Nacogdoches
South Texas
Detroit
Philly Children’s Market
Spalding
San Ramon
San Luis Obispo
Saint Louis
Rock Hill
Philadelphia
Downtown
Houston
Palm Beach County
Orange County
NW Houston
North Central CA
Phoenix
Miami
Memphis
Hilton
Head
Hickory
El Paso County
East Cooper
Dallas
Coachella Valley
Central Carolina
Birmingham
Atlanta
U.S. Average
Connecticut
U.S. Average
(a)
Projections assume all Tenet’s states implement Medicaid expansion; does not include Texas expansion for Vanguard
Source: MPACT 5.0, PRISM 4.1, McKinsey Health Reform Team.
Projected
Expansion
of
Insurance
Coverage
with
Healthcare
Reform
(a)
Vanguard
Tenet
7
Geographic Presence Creates Substantial
Benefit from Affordable Care Act
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%


Source:Vanguard
and Tenet
company financials.
(a)      For Vanguard, acute care only.
(b)      Represents markets with less than 5% of revenue
8
Greater Geographic Diversification Balances Revenue Sources
Texas
17%
California
24%
Florida
19%
Other
(b)
13%
Texas
21%
California
15%
Florida
12%
Michigan
13%
Illinois
5%
Massachusetts
5%
Other
(b)
23%
Pennsylvania
6%
Georgia
7%
Pennsylvania
9%
Other
Markets
(n=10)
41%
Markets
with #1 or #2
Share (n=14)
59%
Other
Markets
(n=11)
30%
Markets
with #1 or
#2 Share
(n=19)
70%
S. Carolina
6%
Missouri
5%
Established Positions in Key Markets
% of Revenues
by State
(CY 2012)
% of Revenues
from #1 or 2 
Market Share
(CY 2012)
Tenet
Standalone
Tenet
Post-Acquisition
(a)


9
(a) Vanguard revenue payor mix is based on Q3YTD actual payor mix
(b) Managed care includes Managed Medicare and Managed Medicaid
Source: Vanguard and Tenet company financial projections.
Broader Service Offering and Well-Balanced Payor Mix
Revenue Breakdown
Inpatient
Outpatient
Services
and other
Health plans
Post-
Acquisition
Tenet
Standalone
Managed
care
(b)
Medicare
Medicaid
Other
Post-
Acquisition
Tenet
Standalone
Revenues By Service, CY 2013
Revenues By Payor
(a)
, CY 2013
10%
31%
59%
56%
32%
8%
4%
11%
22%
59%
8%
10%
24%
58%
8%


28%
increase
in
Conifer
revenues
(incremental
$250
million
added
by
Vanguard
annually)
10
(a) 
2013 est. pro-forma for integration of Catholic Health Initiatives
Builds Conifer’s Position in Fast-Growing
Healthcare Business Services Industry
Conifer
Current
(a)
Conifer Post-
Acquisition
% Increase
Net Client Revenue
Processed Annually
$21B
$26B
24%
Patient Accounts
Processed Annually
10M
12M
20%
Revenues
$890M
$1,140M
28%
Health plans operations augment Conifer’s value-based care capabilities


11
Source:
Company website, Company financials, Vanguard management presentation
(a) Excludes member lives lost from Phoenix Health Plan, with exception of Maricopa
(b) To be launched in 2014
Creates Greater Scale and New Opportunities
Vanguard health plan skills
and capabilities diversify
Tenet’s service offerings
Assists in successful
development of clinical
integration and ACO
models
Capabilities can be
leveraged in managing next
generation payment models
and population health
Enhanced Health Plan Expertise
Vanguard
Tenet
ACO
Health Plan
Michigan
~18,000 lives
Texas
~24,000 lives
~18,000 lives
Florida
~13,000 lives
Georgia
~9,000 lives
(b)
Massachusetts
~32,000 lives
Illinois
~52,200 lives
California
Arizona
~101,000 lives
(a)
CIO


12
Tenet
Vanguard
(a)
($M)
($M)
Both Management Teams Bring Strong Growth
Track Records to Combination
396
525
598
636
714
955
1,036
1,126
1,203
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
$250
$500
$750
$1,000
$1,250
2004
2005
2006
2007
2008
2009
2010
2011
2012
Adjusted EBITDA
Adjusted EBITDA Margin
174
245
255
245
264
299
323
420
573
5.0%
7.0%
9.0%
11.0%
13.0%
$0
$100
$200
$300
$400
$500
$600
2004
2005
2006
2007
2008
2009
2010
2011
2012
EBITDA
EBITDA Margin
(a)
Source: Vanguard Management.
Figures shown on fiscal year basis.  
Vanguard EBITDA does not reflect the effect of stock based compensation.


Synergies are Significant and Achievable
Clearly Identified Through Cost Savings, Benefits of Scale and
Operating Opportunities
13
Revenue Cycle
Management Efficiency
and Improvement
Synergy Area
Estimated
Timing
Supply Chain Management
and Other Operational
Improvement
Overhead Reduction
12-24 months
6-18 months
12-24 months
50% Projected to be Achieved Within the First Year Post-Closing
Projected
Synergies
$100 -
200
million


Analysis Shows Clear Synergy Opportunities
14
Source: Vanguard financials, Tenet financials
Total operating
expense per
adj. discharge
($, acuity-
adjusted)
Cost metric
$6,923
$7,950
-13%
Tenet
comparable
facilities
(FY2012)
Example
Vanguard
market
(Q3 FY2013
YTD)
Opportunities exist
within Vanguard’s acute
care portfolio to capture
synergies through cost
optimization
A large Vanguard
market shows
potential for cost
reduction in operating
expenses when
compared to a set of
Tenet comparable
facilities


Modest multiple compared to historical industry transactions
NPV
of
expected
synergies
of
approximately
$1.4
billion
Committed financing in place from Bank of America Merrill Lynch
Tenet to refinance Vanguard debt at attractive rates
Pro forma debt/EBITDA leverage ratios to decrease within first year
after closing
Projected at 4.75x-5.0x by year-end 2014
Longer term post-acquisition leverage target of 4.25x-4.75x
Tenet’s existing share repurchase program to continue
uninterrupted
Existing NOLs of approximately $1.5 billion to be utilized across the
earnings of the combined organization
15
Tenet Retains Significant Financial Flexibility


Next Steps and Road to Completion
Definitive
agreement
no
Tenet
shareholder
vote;
voting
commitments received from Vanguard controlling shareholders
Regulatory approvals expected
Hart-Scott-Rodino
State and local approvals as required
Tenet intends to complete existing share repurchase program in
2013
Integration team assembled and ready to be deployed immediately
upon closing
Closing expected by year end 2013
16


17
Transaction Enhances Shareholder Value
Substantial
Synergies
Increases
Scale
Broader
Service
Offering
Shareholder
Value
Expanded
Partnership
Opportunities
Maintains
Financial
Flexibility
Strong and
Complementary
Management
Teams
Enhances
Geographic
Breadth
Upside
from
Affordable
Care Act


Reconciliation of EBITDA
Adjusted EBITDA, a non-GAAP term, is defined by the Company as net income (loss) attributable to Tenet Healthcare Corporation common shareholders before (1)
the
cumulative
effect
of
changes
in
accounting
principle,
net
of
tax;
(2)
net
loss
(income)
attributable
to
noncontrolling
interests;
(3)
preferred
stock
dividends;
(4)
income (loss) from discontinued operations, net of tax; (5) income tax benefit (expense); (6) investment earnings (loss); (7) gain (loss) from early extinguishment of
debt; (8) net gain (loss) on sales of investments; (9) interest expense; (10) litigation and investigation benefit (costs), net of insurance recoveries; (11) hurricane
insurance recoveries, net of costs; (12) impairment and restructuring charges, and acquisition-related costs; and (13) depreciation and amortization.  The Company’s
Adjusted EBITDA may not be comparable to EBITDA reported by other companies.
The Company provides this information as a supplement to GAAP information to assist itself and investors in understanding the impact of various items on its financial
statements, some of which are recurring or involve cash payments.  The Company uses this information in its analysis of the performance of its business excluding
items
that
it
does
not
consider
as
relevant
in
the
performance
of
its
hospitals
in
continuing
operations.
In
addition,
from
time
to
time
we
use
this
measure
to
define
certain performance targets under our compensation programs. Adjusted EBITDA is not a measure of liquidity, but is a measure of operating performance that
management uses in its business as an alternative to net income (loss) attributable to Tenet Healthcare Corporation common shareholders. Because Adjusted
EBITDA excludes many items that are included in our financial statements, it does not provide a complete measure of our operating performance. Accordingly,
investors are encouraged to use GAAP measures when evaluating the Company’s financial performance.  The reconciliation of net income (loss) attributable to Tenet
Healthcare Corporation common shareholders, the most comparable GAAP term, to Adjusted EBITDA, is set forth below.
18
For a presentation of Vanguard’s reconciliation of Adjusted EBITDA to financial measures calculated in accordance with GAAP, see Exhibits 99.1 and 99.2 to
Vanguard’s
Reports
on
Form
8-K
filed
with
the
SEC
on
August
23,
2012,
August
25,
2011,
August
26,
2010,
September
1,
2009,
September
22,
2008,
September
18,
2007, September 19, 2006, September 12, 2005 and August 9, 2004.



EX-99.3

Exhibit 99.3

Conference Call

Tenet Healthcare Corporation – Acquisition

of Vanguard Health Systems, Inc.

June 24, 2013

8:30 a.m. EDT

Introduction – Tom

Thank you operator and good morning everyone.

We appreciate you joining our call this morning on such short notice so that we can present additional information on this very important announcement for Tenet. This call is being recorded and will be available on replay.

With us today, we have: Trevor Fetter, Tenet President and CEO; Dan Cancelmi, Tenet CFO; and Keith Pitts, the Vice Chairman of Vanguard. They will walk you through the slide deck that is posted on our website. We will then open up the call to Q&A.

[Slide 1: Disclosures/ Forward-Looking Information]

Before we begin, let me remind you that Tenet’s management will be making forward-looking statements on this call. These statements are qualified by the cautionary note on forward-looking statements set forth on slide 1 and in our annual report on

Form 10-K.

 

Page 1 of 17


During the Q&A portion of the call, callers are requested to limit themselves to one question and one follow-up question.

I’ll now turn the call over to Trevor.

Trevor Fetter

[Slide 2: Acquisition Highlights]

Thank you, Tom. As Tom mentioned, we very much appreciate everyone joining us on short notice. I hope you’ve had a chance to read our press release and have in front of you the presentation that we posted on the investor relations section of our website.

I believe today’s announcement is a major positive step for Tenet, so I would like to begin on Slide 2 by taking you through the highlights of this acquisition and the reasons why we are so excited about it.

To start with the headline, we have signed a definitive agreement in which Tenet will acquire Vanguard Health Systems for 21 dollars per share in an all-cash transaction that has been unanimously approved by both Boards. Including Vanguard’s debt, the total transaction value is approximately 4.3 billion dollars.

 

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This transaction will be meaningfully accretive to Tenet’s earnings in the first year after closing. The combination of the companies enables us to create synergies that come primarily from the initiatives we’ve used to drive nine years of consecutive growth in EBITDA at Tenet. Those of you who have followed us know them by their acronyms: TGI, PMI, MPI and now PEP.

For those of you who aren’t as familiar with the Tenet story, I’m speaking of our demonstrated performance in selecting targeted service lines for growth, driving excellent performance in the revenue cycle and supply chain, using labor management techniques and systems to reduce cost, and implementing two umbrella initiatives that address clinical quality and process standardization.

These synergies are expected to generate very significant value. We already have identified between 100 and 200 million dollars in annual synergies, and we expect to achieve at least half of that run rate in the first year. The net present value of these synergies is approximately 1.4 billion dollars, so they are obviously very material to the strategic rationale for the transaction.

I’m very pleased that Charlie Martin has accepted an invitation from our directors to join our board upon closing. He will bring additional hospital operating and strategic experience to the board, which we see as a huge positive. As you would imagine, Charlie is in Nashville with Vanguard’s headquarters employees today.

 

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On behalf of Ed Kangas, our non-executive chairman, and the other Tenet directors, I want to welcome Charlie to Tenet. Charlie is not only Vanguard’s Chairman and CEO; he also founded the company. I greatly admire the way in which Charlie has built Vanguard, by attracting impressive talent, creating a strong culture, and by building significant scale in the markets in which Vanguard operates. I’m sure you’re aware that Charlie’s track record over several decades in this business is one of repeatedly creating significant value.

As Tom mentioned, Keith Pitts, Vanguard’s Vice Chairman, is with us this morning and he has agreed to join the Tenet team upon closing. I’ve known Keith for many years and hold him in very high regard, and I can assure you that there’s no one in our industry who is better at developing acquisition opportunities and thinking strategically about the future of our industry. I’m looking forward to working closely with Keith, and to getting to know other members of Vanguard’s management team now that the announcement has been made.

One of the things that appeals to us about Vanguard is the complementary cultures of our two companies. We see the opportunity to recruit and retain Vanguard’s operational and corporate talent as a real plus in this acquisition and we will maintain a presence in Nashville.

Rounding out slide 2, we intend to continue our current share repurchase program in 2013, and while this transaction will result in a higher level of financial leverage for Tenet at the outset, we expect to return to pre-acquisition leverage by the end of 2014. Finally, we expect to close the transaction by the end of this year.

 

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[Slide 3: Well-Positioned for the New Health Care Environment]

Moving to slide 3, this acquisition will enhance Tenet’s position in what we all acknowledge is a new and rapidly evolving health care environment.

The acquisition of Vanguard significantly increases our scale and diversifies our geographic footprint, increasing our hospital and outpatient facilities by 61 percent and 25 percent, respectively.

This acquisition will create a broader platform across which we can apply our skills in revenue cycle services, cost management and quality improvement, as well as our clinical integration and network development strategies. We will be taking some pages out of Vanguard’s playbook in these areas and rolling those out in our existing facilities and markets. Importantly, we will have new opportunities to actively manage our portfolio across the spectrum of assets that we will now own and operate.

Geographically, this transaction increases our reach significantly and enhances our growth opportunities. Tenet’s strategic priorities have always placed value on the creation of leadership positions in our markets. We will now be #1 or #2 in 19 key markets.

It is important to note that Tenet and Vanguard serve totally distinct markets with essentially no overlap. We are excited to add clear leadership positions in the growing and highly attractive San Antonio and South Texas markets, two of the crown jewels in Vanguard’s portfolio.

 

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Those of you who know Tenet are familiar with our industry-leading business services division called Conifer Health Solutions. With the acquisition of Vanguard, we can now leverage Conifer across a much broader portfolio. In addition, the expertise and capabilities that Vanguard has developed from its health plan operations will enhance Conifer’s value-based care and population health management offerings and our own small health plan operations.

Vanguard’s hospitals will also become revenue cycle clients for Conifer. This will add materially to Conifer’s scale and drive incremental earnings power.

Vanguard’s health plan expertise in developing its ACO models and its successful clinical integration experience also will be important for our new and broader physician network. We will be in a better position to recruit, retain and align our physicians after the integration of our two systems.

Finally, because our cultures are so complementary, I have great confidence that our integration will go smoothly. I’ve been aware for a long time that we shared cultural values such as a commitment to high standards of clinical quality, ethics, and compliance, and that we are two organizations that put patients first. As evidence, I would invite you to review the two companies’ records of high scores in the CMS Core Measures and other metrics for assessing clinical quality.

 

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[Slide 4: Complementary Operational Strengths and Shared Values]

As illustrated on slide 4, the management teams of both Tenet and Vanguard have shown the ability to successfully manage and grow their organizations through a period of significant complexity in the health care system.

Tenet’s track record in driving organic growth will now be augmented by an organization that has proven adept at generating growth through acquiring new facilities and creating partnerships with not-for-profit health systems to develop new markets. The great success we have achieved with our systematic approach to reducing costs through our Performance Excellence Program can accelerate the trajectory of margin improvement of Vanguard’s hospitals, many of which have been part of the company only a short time. In addition, we have found a number of areas where Vanguard has been very successful with innovative approaches to reducing costs, and we believe we can drive better performance in the Tenet hospitals by implementing Vanguard’s strategies across our portfolio.

For example, Vanguard has a very promising pilot program to reduce implant costs by controlling clinical pathways and device selection. Also, Vanguard has a strong process in place for drug formulary management, which includes a common repository for formulary, a strong substitution function, and audits of “off contract” prescribing. This process will fit well with Tenet’s strong Medication Use Management program that has driven significant savings company-wide.

 

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Tenet’s approach to centralized managed care contracting and outpatient development strategies provide opportunities in Vanguard markets, while Vanguard’s expertise in health plan operations and innovative payment models will enhance the work that we are doing in those same areas.

By combining our operating strengths, we expect that we will continue to find both cost savings strategies and operational innovations in both of our organizations that we can leverage across a much larger base.

Again, with the acquisition of Vanguard, Tenet will be a stronger company, better positioned strategically, with best in class quality and safety programs, and perhaps most important of all, a value-based culture that is driven by ethics and a commitment to quality. Both companies take our responsibility to our patients and the communities we serve very seriously. At Tenet, we have been impressed by what we found during our extensive due diligence process.

[Slide 5: Established Positions in Key Markets]

As you can see from the map on slide 5, with the addition of Vanguard, Tenet will go from 49 hospitals and 126 outpatient centers serving 24 markets across 11 states, to 79 hospitals and 157 outpatient centers in 30 markets across 16 states.

This increased breadth allows for new opportunities for in-market growth and enhances our business by diversifying our geographic footprint.

 

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[Slide 6: Adds Important New Markets in Texas]

Slide 6 shows that with the addition of the San Antonio and Harlingen-Brownsville markets to our existing operations in El Paso, Houston, Dallas and Nacogdoches, our revenues will double in the fast growing state of Texas. The opportunity to expand in Texas at this time, well in advance of the full implementation of health reform, is a very attractive feature of this transaction.

We look forward to applying our successful Outpatient, Physician, and Performance Excellence Program strategies to these key Texas markets. The extensive experience that Vanguard has with the Medicare ACE demonstration program in San Antonio will be of great value to our own efforts in developing new contracting models. And like many of our markets, Vanguard’s San Antonio and South Texas facilities are expected to experience significant upside related to the implementation of the Affordable Care Act.

[Slide 7: Geographic Presence Creates Substantial Benefit from Affordable Care Act]

Most of you have seen a scatter gram similar to the one on slide 7, on which we previously have shown the expected change in covered lives for each of our markets following implementation of the Affordable Care Act. On this version, we show market level data to illustrate how the Vanguard acquisition strengthens Tenet’s already attractive positioning relative to healthcare reform.

 

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[Slide 8: Established Positions in Key Markets]

The addition of the Vanguard markets brings Tenet greater diversification of revenue sources as we expand geographically. As the top pair of pie charts on slide 8 show, this acquisition preserves Tenet’s strategy of building leading market share positions.

In addition, as the lower pie charts make clear, we are enhancing our diversification of revenue by adding a number of markets in Arizona, the upper Midwest and the Northeast.

[Slide 9: Revenue Breakdown]

Moving to slide 9, you can see that this diversification of revenue mix is not just geographical – we also will have a broader service offering because of the addition of Vanguard’s health plan operations. And importantly, as the right hand set of bars demonstrates, our balanced payor mix, with nearly 60% of our revenue coming from managed care, remains basically the same post-acquisition.

[Slide 10: Builds Conifer’s Position in Fast-Growing Healthcare Business Services Industry]

Slide 10 shows the very positive impact of this transaction on Conifer. We anticipate that with the addition of the Vanguard facilities, Conifer will process an additional 5 billion dollars in net client revenue, which should result in 250 million dollars in incremental annual revenue to Conifer. As you can see, the Vanguard acquisition adds to Conifer’s scale across the board.

 

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[Slide 11: Enhanced Health Plan Expertise]

Turning to slide 11, the expertise that Vanguard has established in operating its health plans and ACOs, touching roughly 200,000 lives, brings additional diversification to our service offering. Again, while we were doing our due diligence, what we found from a management standpoint was impressive. Vanguard has processes and models in place that will enhance our ability to respond to opportunities that involve both payors and providers, such as state and federal initiatives to improve care and reduce cost for Medicare dual eligibles.

[Slide 12: Management Teams Bring Strong Growth Track Records to Combination]

Slide 12 shows that these are two companies that have great track records of consistent and sustained growth. Both companies grew EBITDA at a compound annual rate of roughly 15% over eight years. Tenet did it primarily through organic growth and Vanguard in substantial part through acquisition. I see these skills as complementary, and as acquisition opportunities become more attractive, and the necessity of organic growth more pressing, the combination of Tenet and Vanguard should be a very powerful engine of value creation.

 

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[Slide 13: Synergies are Significant and Achievable]

I’ve been telling investors for many months at conferences and in meetings that the systems and skills we’ve developed to drive our organic growth is a source of synergy. That’s true whether we’re talking about a single hospital, a single surgery center, or an entire group of facilities. Slide 13 outlines the synergies that we have identified in this transaction.

Specifically, three areas – revenue cycle management efficiency and improvement, overhead reduction and supply chain and other operating improvements – comprise synergies totaling 100 to 200 million dollars annually. We expect that at least half of the synergies we’ve identified will be achieved in the first year following the closing of this transaction.

[Slide 14: Analysis Shows Clear Synergy Opportunities]

To give you a sense of our confidence about the specific synergies associated with the acquisition of Vanguard, look at the analysis of the performance of a select Vanguard market relative to the performance of a combination of similar Tenet hospitals on Slide 14. This slide shows where we see the potential for cost reduction in operating expenses when we compare that market’s performance to a group of Tenet’s comparable facilities. A large part of Vanguard’s revenue comes from facilities that are relatively new to their system. They are improving the margins of those markets on their own, but we believe we’ll be able to accelerate the margin improvement by implementing our well-developed systematic approach to performance excellence.

 

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I hope you now have an idea why we think that this acquisition is so attractive from an operational and strategic standpoint. And to provide some financial details, I’ll now turn things over to Tenet’s CFO, Dan Cancelmi. Then I’ll come back for some closing remarks…Dan

Dan Cancelmi

[Slide 15: Tenet Retains Significant Financial Flexibility]

Thanks Trevor. Turning to slide 15, one of the reasons I’m excited about this acquisition is that although it is a significant transaction, we will still maintain our financial flexibility. I’m very pleased that we will be paying a modest multiple for Vanguard compared with historical transactions in this sector while offering an attractive premium to Vanguard’s shareholders. As Trevor mentioned, we estimate the net present value of the expected synergies from this transaction will be approximately $1.4 billion, clearly a substantial amount.

We already have in place the committed financing to close the transaction. Our leverage ratio, which will initially see an uptick, is expected to be in the range of the 4.75 to 5 by year-end 2014. Ultimately we would like to bring that down to a range of 4.25 to 4.75.

I do want to emphasize that our existing share repurchase program will continue through the rest of this year with share repurchases of approximately $200 million in the second half of 2013. Our existing NOLs of approximately $1.5 billion can be utilized across the earnings of the combined organization, meaning that we will utilize them more quickly, thus increasing their net present value and enhancing our cash flows.

 

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Since we’ve recently seen a number of analyst reports suggesting the industry is experiencing a soft second quarter, let me provide an update on recent trends we are seeing in the quarter. The soft inpatient volume environment, which adversely impacted the industry in Q1, has continued into Q2. Based on our quarter-to-date admissions, we estimate our Q2 admissions will be approximately 3.5 percent lower than last year’s second quarter, which is meaningfully softer than what we had expected for the quarter.

Because of this, we expect our Adjusted EBITDA for the second quarter will be toward the low end of our Outlook range of $325 million to $375 million. Looking beyond admissions in the quarter, our outpatient strategies, commercial pricing, cost controls and other key performance measures are meeting our objectives. As we discussed on our April earnings call, we are pleased to confirm that we will recognize the anticipated amounts related to the approval of the managed care portion of the California Provider Fee program and HIT incentives. We will provide further clarity and specifics about the quarter in our second quarter earnings release and conference call, which is currently scheduled for August 6th.

[Slide 16: Next Steps and Road to Completion]

Slide 16 addresses the road to completing the acquisition and our integration process. Given that we have already signed a definitive

 

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agreement, that no shareholder vote is needed on our side, and that voting commitments from Vanguard’s controlling shareholders have been received, we expect to close the transaction by year-end.

We have already formed an integration team, and that team is ready to go with a carefully-structured and well-designed integration plan. As a result, we should begin to realize the financial and operational benefits of this acquisition in 2014, including capturing a significant portion of the projected synergies.

I will now hand the call back to Trevor. Trevor…

Trevor Fetter

Thanks Dan. As I mentioned, Keith Pitts, Vanguard’s Vice Chairman, has been gracious enough to join us today here in Dallas and will be joining the Tenet senior management team as Vice Chairman upon closing. I’ve asked Keith to make a few comments on behalf of the Vanguard team. Keith…

Keith Pitts

Thank you Trevor for your kind words earlier and for all your support for the Vanguard team. I am looking forward to working with all of you on integrating our two organizations, and as part of the Tenet team after this transaction closes. We all agree that this is a transformational time for our industry and we at Vanguard believe that by bringing our people, facilities and technology into the Tenet organization, we’ll be in a better position to be a driving force in this new environment.

 

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I have known several of the Tenet team members for many years and believe that this combination is in the best interests of all of our stakeholders. We share similar values and both Vanguard and Tenet are focused on providing the best care for our patients in the communities we serve. I look forward to working with the Tenet team and to speaking with many of you on the call in the days and months ahead.

With that, I will hand the call back to Trevor.

Trevor Fetter

[Slide 17: Transaction Enhances Shareholder Value]

Thank you so much Keith – and thanks to my colleagues at Tenet as well as to you and the rest of the team at Vanguard who have worked so hard to bring this transaction together.

To summarize, as slide 17 shows, this is a value-creating transaction for us. It’s a strategic move that creates a powerful new health care company that is well positioned to compete effectively in a rapidly changing environment. I believe it’s a compelling transaction for our shareholders, as we can enhance and diversify our geographic markets, increase our operating scale, capture significant revenue and cost synergies, and maintain a strong balance sheet. As we go forward, the reputation

 

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Vanguard has developed in the not-for-profit sector for being a good partner willing to engage in collaborative market development strategies will be essential to augmenting our growth.

Together we bring to our expanded enterprise complementary cultures, a shared commitment to quality, and managers with expertise across a wide range of services. At this time of unprecedented change in healthcare, we believe that the combined company will be better prepared to lead the transformation.”

[PAUSE]

I would like to thank everyone for calling in this morning and we will now take your questions.

Operator, please assemble the queue for the question and answer portion of the call.

 

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