Tenet Critic Sees Liquidity Squeeze
By Melissa Davis
TheStreet.com Senior Writer01/08/2004 07:01 AM EST
Tenet's (THC:NYSE - news - research) days could be numbered.
One health care expert who has long kept a finger on Tenet's pulse believes the company could run out of time as early as this year. Jeff Villwock, once celebrated by The Wall Street Journal as the nation's top health care analyst, calculated this week that Tenet could soon face a cash crunch and wind up with a liquidity value of "less than zero." Villwock offered his prognosis as a second opinion countering a bullish view published last month by Barron's. In that piece, Barron's concluded that "even if the government drives Tenet out of business," the company's assets would generate at least $7 a share for investors.
But Villwock, who started analyzing the company years ago on behalf of the Tenet Shareholder Committee, says that Barron's only looked at one side of the balance sheet when reaching its conclusion.
"We believe [Barron's] overstated the case by concentrating on Tenet's assets and failing to account for the company's massive potential liabilities and the resulting potential for a liquidity crisis later this year or in 2005," the Tenet Shareholder Committee stated, citing Villwock's analysis. "The most serious problems for Tenet may still lie ahead."
On Dec. 22, Barron's highlighted Tenet as a potentially great catch for investors willing to bottom-fish for deep-value stocks. Although it acknowledged that Tenet faces real financial exposure -- particularly from multiple government investigations -- it concluded that any future settlement is "likely to be one that Tenet can afford to pay."
Villwock is far more skeptical. He zeroed in on a quote from Tenet's own CEO to show how a single bill could wipe out the entire company. Tenet leader Trevor Fetter told Barron's that the company had been aggressively billing Medicare for generous outlier payments and "would have had to give the money back" if it continued to do so. But Villwock estimates that Tenet overcharged Medicare by $1.9 billion, a figure based on a "complex set of calculations [that's] fully supportable," before the company finally dropped its aggressive practices last year.
Even without treble damages -- which the government can pursue -- a $1.9 billion repayment would topple Tenet right now, Villwock says.
"If they owe the money back, the question is, 'When do they owe it?'" Villwock said. "If it's this afternoon, they're bankrupt. They've got to go down and file tomorrow morning."
Tenet's stock, which has jumped $1 since Barron's published its upbeat piece, slipped 3 cents Wednesday, to $16.30.
Obligations Everywhere
Villwock calculates Tenet's total liquidity, including cash from recent asset sales and a $1 billion credit line, at just $1.85 billion. And he points to the potential outlier refund as just the biggest of the company's many liabilities.
Meanwhile, he says, some other bills are already coming due. This year alone, Tenet must pay company founder John Bedrosian a $148 million settlement unless the California Supreme Court reverses a sternly worded decision against the company that it issued in September. It must also pay a $275 million claim from the Internal Revenue Service, even if it plans to dispute the tax matter.
After that, Villwock says, Tenet will have just $1.43 billion left. He predicts that Tenet will then go on to lose, rather than generate, cash for the next 12 months or longer.
"Tenet will more likely eat up about $360 million in cash, lowering the company's available liquidity to just over $1 billion -- and all of this must be borrowed," Villwock determined. "If Tenet doesn't improve operations, they will not have the ability to generate the cash" to satisfy liabilities.
Villwock isn't banking on a turnaround, either. With labor costs and bad debts rising, he says, Tenet could lose $360 million this year and continue to bleed in 2005. In the meantime, he says, the bills are already piling up.
Besides a possible outlier repayment, Villwock lists Tenet's legal exposure at Redding Medical Center as the company's biggest liability. Tenet has already paid a record-breaking $54 million government fine to settle allegations that it profited from unnecessary heart surgeries performed at the Redding facility. But attorneys estimate that the company could wind up paying another $1 billion to settle more than 1,000 patient lawsuits still pending against the hospital.
"Unless the [Justice Department] believes that Tenet has done no wrong -- and unless juries in Redding, Calif., and elsewhere conclude the same -- Tenet could be in for a liquidity crisis, and its assets may not exceed the company's potential liabilities," the shareholder committee reported this week.
The state of California, where the Redding suits are pending, allows senior citizens to petition for trial dates that begin within six to nine months after their cases are filed. So Villwock expects settlements or verdicts to be reached on at least some of those cases sometime this year.
Sunshine State
And Tenet's exposure doesn't end there. The company faces more than 100 patient lawsuits -- 20 involving deaths -- filed against a Florida hospital that was nearly shut down by Medicare for lax infection control. It faces a separate government trial in Florida this month for allegedly paying illegal kickbacks to doctors. It is suspected of similar kickbacks in California, where two of its hospital executives are headed for trial next month. It has been accused of "upcoding" violations that could cost it more than $500 million. And it has fielded government subpoenas seeking information about everything from physician location agreements to questionable surgeries (beyond Redding) to insider trading to possible Medicaid fraud.
"Add all that up and you don't know what the total will be," Villwock says. "Where will all this money come from? I don't think there's any way, over the next 12 months, they can produce cash from operations."
Nor does he share Barron's conviction that the company will inevitably survive.
"It depends on what the bill is," and said, "and how much time they have to pay it."
Villwock isn't even sure that Tenet's bank line -- offering more than half the company's liquidity -- will even be there if the company desperately needs it. He questions why a bank would lend $1 billion to a company in such dire straits to begin with. And he doubts that other lenders, noting Tenet's weakened coverage ratios, will follow suit anytime soon.
The Tenet Shareholder Committee, which published Villwock's analysis on Tuesday, cautioned investors against looking on the bright side.
"We believe anyone who looks at Tenet with rose-colored glasses risks both his money and his health," the committee stated. "Shareholders who saw a loss of 70% in shareholder value and patients who risked their lives in Tenet hospitals learned this lesson the hard way."