SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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)
|(State of Incorporation)||
1445 Ross Avenue, Suite 1400
Dallas, Texas 75202
(Address of principal executive offices, including zip code)
(Registrants 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.
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 Vanguards 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 Managements Discussion and Analysis of Financial Condition and Results of Operations in our and Vanguards 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.|
|99.1||Joint press release dated as of June 24, 2013|
|99.2||Investor presentation slides|
|99.3||Investor conference call script|
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|
|Name:||Paul A. Castanon|
Vice President, Deputy General Counsel and
|99.1||Joint press release dated as of June 24, 2013|
|99.2||Investor presentation slides|
|99.3||Investor conference call script|
Tenet to Acquire Vanguard Health Systems for $21 per share in Cash
Expands Tenets 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 Conifers 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 Conifers capabilities to Vanguards 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, Vanguards founder, chairman and chief executive officer, will join Tenets Board of Directors. Keith Pitts, Vanguards vice chairman, will join the Tenet senior management team as vice chairman.
Fetter added, Tenets 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 Vanguards 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 Tenets 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 Vanguards legal counsel and JP Morgan acted as exclusive financial and strategic advisor.
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 Tenets 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. Tenets 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 companys strategy is to develop locally branded, comprehensive health care delivery networks in urban and suburban markets.
|Tenet Healthcare Corporation|
Steven Campanini (469) 893-2247
Thomas Rice (469) 893-2522
|Vanguard Health Systems|
Trip Pilgrim (615) 665-6151
Gary Willis (615) 665-6098
# # #
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 Corporations (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 Tenets 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 Managements Discussion and Analysis of Financial Condition and Results of Operations in Tenets and Vanguards 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.
Vanguard Health Systems
A New Company for a New Healthcare Environment
June 24, 2013
Disclosures / Forward-Looking Statements
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.
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 Managements Discussion and Analysis of Financial Condition and Results of Operations in our and
Vanguards 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.
Unanimously approved by both Boards of Directors
Accretive to Tenets earnings in year one
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
Includes $2.5 billion in Vanguard debt
Well-Positioned for the New Healthcare
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
Adds geographic diversification with expansion into additional states
Physician alignment, recruitment and employment strategies applied across
Leverages Vanguards health plan experience developing successful clinical
integration and ACO models
Leverages Conifer Health Solutions across broader portfolio
population health management capabilities
Combines two organizations with similar values, priorities and demonstrated
cultures of ethics and compliance
Tenets proven management capabilities augmented by Vanguard turnaround
expertise and experience in health plan operations
Successful track record
of generating growth by
acquisition and strategic
of ethics and
High quality clinical
quality and safety
Complementary Operational Strengths and
Successful track record of
generating organic growth
Systematic approach to cost
Excellent centralized managed
care contracting and outpatient
and scalable revenue
Innovative approaches to
Expertise in health plan
operations and innovative
Experienced in not-for-profit
partnerships and turn-
Established Positions in Key Markets
Greater Breadth Provides Opportunities for Revenue Growth
Excludes 2 Connecticut hospitals currently under LOI
Complements established Tenet positions in El Paso,
Houston, Nacogdoches and Dallas
Both new markets demonstrate underlying population
Vanguard showing strong organic growth in its own
#2 system in Texas' 3rd largest market
Opportunities for additional growth
Harlingen / Brownsville
Opportunities for further earnings improvement in
Pro forma revenue doubles from $1.5B to $3.0B
Vanguards 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
Includes 3 freestanding OP facilities recently acquired by Tenet
Includes 2 Vanguard hospitals under development
13 OP Centers
15 OP Centers
8 OP Centers
2 OP Centers
1 OP Center
8 OP Centers
Medicare and Medicaid Covered Lives
(Projected Growth: 2013-2017)
Philly Childrens Market
San Luis Obispo
Palm Beach County
North Central CA
El Paso County
Projections assume all Tenets states implement Medicaid expansion; does not include Texas expansion for Vanguard
Source: MPACT 5.0, PRISM 4.1, McKinsey Health Reform Team.
Geographic Presence Creates Substantial
Benefit from Affordable Care Act
(a) For Vanguard, acute care only.
(b) Represents markets with less than 5% of revenue
Greater Geographic Diversification Balances Revenue Sources
with #1 or #2
with #1 or
Established Positions in Key Markets
% of Revenues
% of Revenues
from #1 or 2
(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
Revenues By Service, CY 2013
Revenues By Payor
, CY 2013
2013 est. pro-forma for integration of Catholic Health Initiatives
Builds Conifers Position in Fast-Growing
Healthcare Business Services Industry
Net Client Revenue
Health plans operations augment Conifers value-based care capabilities
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
Tenets service offerings
Assists in successful
development of clinical
integration and ACO
Capabilities can be
leveraged in managing next
generation payment models
and population health
Enhanced Health Plan Expertise
Both Management Teams Bring Strong Growth
Track Records to Combination
Adjusted EBITDA Margin
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
Supply Chain Management
and Other Operational
50% Projected to be Achieved Within the First Year Post-Closing
Analysis Shows Clear Synergy Opportunities
Source: Vanguard financials, Tenet financials
within Vanguards acute
care portfolio to capture
synergies through cost
A large Vanguard
potential for cost
reduction in operating
compared to a set of
Modest multiple compared to historical industry transactions
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
Projected at 4.75x-5.0x by year-end 2014
Longer term post-acquisition leverage target of 4.25x-4.75x
Tenets existing share repurchase program to continue
Existing NOLs of approximately $1.5 billion to be utilized across the
earnings of the combined organization
Tenet Retains Significant Financial Flexibility
Next Steps and Road to Completion
commitments received from Vanguard controlling shareholders
Regulatory approvals expected
State and local approvals as required
Tenet intends to complete existing share repurchase program in
Integration team assembled and ready to be deployed immediately
Closing expected by year end 2013
Transaction Enhances Shareholder Value
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)
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 Companys
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
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 Companys 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.
For a presentation of Vanguards reconciliation of Adjusted EBITDA to financial measures calculated in accordance with GAAP, see Exhibits 99.1 and 99.2 to
2007, September 19, 2006, September 12, 2005 and August 9, 2004.
Tenet Healthcare Corporation Acquisition
of Vanguard Health Systems, Inc.
June 24, 2013
8:30 a.m. EDT
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 Tenets 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
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.
Ill now turn the call over to Trevor.
[Slide 2: Acquisition Highlights]
Thank you, Tom. As Tom mentioned, we very much appreciate everyone joining us on short notice. I hope youve 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 todays 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 Vanguards debt, the total transaction value is approximately 4.3 billion dollars.
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This transaction will be meaningfully accretive to Tenets earnings in the first year after closing. The combination of the companies enables us to create synergies that come primarily from the initiatives weve 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 arent as familiar with the Tenet story, Im 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.
Im 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 Vanguards 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 Vanguards 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. Im sure youre aware that Charlies track record over several decades in this business is one of repeatedly creating significant value.
As Tom mentioned, Keith Pitts, Vanguards Vice Chairman, is with us this morning and he has agreed to join the Tenet team upon closing. Ive known Keith for many years and hold him in very high regard, and I can assure you that theres no one in our industry who is better at developing acquisition opportunities and thinking strategically about the future of our industry. Im looking forward to working closely with Keith, and to getting to know other members of Vanguards 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 Vanguards 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.
Page 4 of 17
[Slide 3: Well-Positioned for the New Health Care Environment]
Moving to slide 3, this acquisition will enhance Tenets 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 Vanguards 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. Tenets 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 Vanguards portfolio.
Page 5 of 17
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 Conifers value-based care and population health management offerings and our own small health plan operations.
Vanguards hospitals will also become revenue cycle clients for Conifer. This will add materially to Conifers scale and drive incremental earnings power.
Vanguards 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. Ive 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.
Page 6 of 17
[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.
Tenets 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 Vanguards 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 Vanguards 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 Tenets strong Medication Use Management program that has driven significant savings company-wide.
Page 7 of 17
Tenets approach to centralized managed care contracting and outpatient development strategies provide opportunities in Vanguard markets, while Vanguards 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.
Page 8 of 17
[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, Vanguards 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 Tenets already attractive positioning relative to healthcare reform.
Page 9 of 17
[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 Tenets 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 Vanguards 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 Conifers 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 Conifers scale across the board.
Page 10 of 17
[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.
Page 11 of 17
[Slide 13: Synergies are Significant and Achievable]
Ive been telling investors for many months at conferences and in meetings that the systems and skills weve developed to drive our organic growth is a source of synergy. Thats true whether were 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 weve 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 markets performance to a group of Tenets comparable facilities. A large part of Vanguards 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 well 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, Ill now turn things over to Tenets CFO, Dan Cancelmi. Then Ill come back for some closing remarks Dan
[Slide 15: Tenet Retains Significant Financial Flexibility]
Thanks Trevor. Turning to slide 15, one of the reasons Im excited about this acquisition is that although it is a significant transaction, we will still maintain our financial flexibility. Im 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 Vanguards 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 weve 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 years 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 Vanguards 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
Thanks Dan. As I mentioned, Keith Pitts, Vanguards 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. Ive asked Keith to make a few comments on behalf of the Vanguard team. Keith
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, well 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.
[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. Its 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 its 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.
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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