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Community Health Unveils $3.3 Billion Bid for Tenet

Community Health Systems on Thursday announced a $3.3 billion unsolicited offer for a smaller rival, Tenet Healthcare, hoping to seize upon the Obama administration’s overhaul of health care to create a new hospital giant.

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The offer is the most vivid illustration yet of how the changes in regulations are shaping strategic decisions in the health care industry. Starting in 2014, the overhaul will reduce the number of uninsured Americans and increase the number of paying patients. Hospital operators like Community, the biggest publicly traded for-profit hospital company, hope to get them.

Already, the new regulations have started a wave of deals across the health care spectrum, and analysts and deal makers have said that they expect further consolidation.

By combining with Tenet, Community is hoping to overtake the privately held HCA as the biggest player in the for-profit hospital sector by number of hospitals. A merger of the two would create a company with 176 hospitals in 30 states to HCA’s 150 hospitals.

HCA would still be able to treat more patients, overseeing 38,349 licensed beds to the combined Community-Tenet’s 32,830 beds. HCA, owned by a consortium of private equity firms, is seeking to go public.

But Community is a long way from clinching a deal. Tenet said in a statement on Tuesday evening that its board had already reviewed the bid over recent weeks and determined that it was “opportunistic,” short-changing Tenet shareholders.

Community is offering to pay $6 a share, consisting of $5 in cash and $1 in stock. The price represents about a 40 percent premium to Tenet’s Thursday closing share price of $4.29. The proposed merger’s enterprise value, which includes debt, is about $7.3 billion.

By pursuing Tenet, which focuses on hospitals in urban areas, Community is moving beyond its core business of running medical centers in smaller communities. The company appears to be betting on wringing improvements from acquiring Tenet’s faster-growing patient admissions, according to Sheryl Skolnick, an analyst with CRT Capital.

In a letter to Tenet’s board and its chief executive, Trevor Fetter, Community said that it took its offer public after Tenet’s directors rejected the bid this week for not offering “even remotely fair value.”

But in a letter on Wednesday to Community rejecting the approach, Mr. Fetter and Edward Kangas, Tenet’s chairman, wrote that the offer ignored expected profit improvements at Tenet, as well as items like net operating loss tax benefits that should be accounted for.

Moreover, the two wrote that Community’s own performance suggested that its stock was overvalued and that Tenet had questions over its suitor’s ability to manage the merger.

“It is clear to us that your stand-alone prospects have slowed and you are pursuing an acquisition of Tenet to drive the growth you cannot achieve on your own,” they wrote.

Shares in Tenet have fallen 20.4 percent this year. Shares in Community have fallen 11.1 percent.

“Given the steep sell-off in Tenet’s shares following the passage of reform in March, it will be extremely difficult for the company to convince shareholders that it should reject Community Health’s offer outright,” Sam Goodyear, an analyst with the research firm CreditSights, said Thursday evening. He added that he believed the offer to be fair.

But other analysts disagreed.

Ms. Skolnick pointed to Tenet’s ability to increase its profits and margins faster than the industry as a whole over the last four years. Tenet has also benefited from higher admission volumes at its hospitals.

“I think Tenet sees this deal as a pathway to growth,” she said.

While Community would prefer to reach a friendly deal, it strongly hinted that it might go hostile if Tenet continued to reject its approach, its chairman and chief executive, Wayne T. Smith, wrote in the letter to Tenet’s board.

“We are committed to completing this transaction and will consider all alternatives necessary to do so,” Mr. Smith wrote. “This transaction is a strategic priority for us and has the full attention of our management team and the unanimous support of our board of directors.”

Tenet, based in Dallas, has had its troubles over the last two decades. Among the most notable was a federal investigation into whether the company overbilled Medicare throughout the 1990s. Tenet agreed to settle the charges for about $900 million in payments and foregone fees.

The company has slowly rebuilt its operations since then, having posted annual profits in 2008 and 2009 after a string of losses. It reported $9 billion in revenue and $187 million in net income last year.

Community is no stranger to deal-making, having struck 17 deals since 2006, according to data from Capital IQ. Its biggest acquisition was the $5.1 billion purchase of Triad Hospitals in 2007, in which it bested a rival offer by two private equity firms.

Community, based in Franklin, Tenn., had about $12.1 billion in revenue and $243.2 million in profit last year.

Community is being advised by Credit Suisse and the law firm Kirkland & Ellis. Tenet is being advised by Barclays Capital and the law firms Gibson Dunn & Crutcher and Debevoise & Plimpton.

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