UPDATE 3-Hospital chain Tenet to buy Vanguard Health for $1.73 bln
* Offer of $21 per Vanguard share is 70 pct premium
* Deal includes assumption of $2.54 bln debt
* Tenet estimates $100 mln-$200 mln annual savings
June 24 (Reuters) - U.S. hospital operator Tenet Healthcare Corp said on Monday it will buy smaller rival Vanguard Health Systems Inc for about $1.73 billion, putting it in a better position to benefit from the expected millions of Americans about to get insurance under President Barack Obama's healthcare reform.
Investors expect hospitals to benefit from treating more Americans insured under the reform law, whether through government subsidies to individuals to buy health coverage or an expansion of the Medicaid program for the poor. Speculation of that major hospital chains would increase their acquisitions has fueled stocks in the sector.
Tenet's purchase of Vanguard is expected to close by the end of the year. The U.S. health overhaul takes full effect next January.
Dallas-based Tenet said the combined company would have 79 hospitals and 157 outpatient centers, making it No. 1 or No. 2 in 19 key markets, including San Antonio and South Texas.
Tenet Chief Executive Trevor Fetter told analysts on a conference call the deal signaled a new acquisitions appetite for the company, which has acquired only one hospital in the past eight years. "It is a turning point for Tenet," he said.
The stock rose 7 percent, while Vanguard soared 67 percent.
Tenet's offer of $21 per share, a premium of 70 percent to Vanguard's Friday close, represented the highest price for the stock since the company's initial public offering in 2011. Under the deal, Tenet also assumes $2.54 billion of Vanguard debt.
As providers prepare for the overhaul of the healthcare system, they are grappling with a slowdown in the use of medical services. Americans are visiting doctors less frequently and having fewer elective procedures as out-of-pocket costs rise.
Tenet said the trend of fewer patient admissions in the first quarter continued into the second period. They are expected to decline by 3.5 percent in the quarter from a year earlier.
The company sees second-quarter adjusted earnings before interest, taxes, depreciation and amortization closer to the lower end of its previous forecast of $325 million to $375 million.
Private equity firm Blackstone Group LP is Vanguard's biggest shareholder, with a 38 percent stake. Founder and CEO Charles Martin owns 4.18 percent and will join Tenet's board as a director.
"It's a very smart deal for (Tenet) to be doing at this juncture, and I think gaining the services of both Keith Pitts and Charlie Martin ... is crucial to this," said CRT Capital Group analyst Sheryl Skolnick, who has a "buy" rating on both companies. Pitts is Vanguard's vice chairman.
Analysts said the premium being paid was reasonable, given the potential savings from the deal. Tenet expects it to add to earnings in the first year and estimates annual cost savings of $100 million to $200 million.
Tenet shares rose 2.5 percent to $42.91 on the New York Stock Exchange. Vanguard soared 69.3 percent to $20.94.
Tenet, which fended off a hostile takeover attempt by larger competitor Community Health Systems Inc in 2011, operates 49 hospitals and 122 freestanding outpatient centers in California, Texas, Pennsylvania and other states in the Southeast.
Based in Nashville, Tennessee, Vanguard owns 28 acute care and specialty hospitals in the Midwest, South and Massachusetts.
Gibson Dunn & Crutcher was Tenet's legal counsel and Lazard, Bank of America Merrill Lynch, Barclays and Teneo Capital were financial and strategic advisers. Vanguard was advised by J.P. Morgan. Skadden, Arps, Slate, Meagher & Flom was legal counsel.
Tenet said it has secured fully committed financing from Bank of America Merrill Lynch.