Dive Brief:
- Tenet Healthcare will sell its majority ownership in Birmingham, Alabama-based Brookwood Baptist Health for about $910 million to Orlando Health, the health system said Monday.
- The sale, which is expected to close in the fall of this year, includes 70% of Tenet’s interest in the five-hospital system, as well as affiliated physician practices and other related operations.
- The deal continues Tenet’s streak of divestitures as it looks to deleverage its portfolio. This year, the system has sold nine hospitals to Novant Health, UCI Health and Adventist Health for a combined after-tax profit of $3 billion.
Dive Insight:
During Tenet’s second-quarter earnings call last month, an analyst from Raymond James joked that his firm would fire him before he’d witness the highly leveraged system successfully reduce its debt to earnings ratio below 3.0x.
Yet, Tenet has steadily made progress over the past year to pare down its debt to adjusted earnings before interest, taxes, depreciation and amortization ratio, posting a 3.89x ratio in December, 2.79x in March and a 2.61x ratio by the end of the second quarter.
Tenet CEO Saum Sutaria said on the call that the company is committed to lowering that ratio even further. Tenet has already retired $2.1 billion of debt in 2024 and plans to further deleverage.
Asset sales have been critical to Tenet’s rapid deleveraging, according to analysts at Jefferies and Fitch Ratings.
Under the latest deal, Tenet will divest its interest in Brookwood Baptist Medical Center, Princeton Baptist Medical Center, Walker Baptist Medical Center, Shelby Baptist Medical Center and Citizens Baptist Medical Center.
The hospitals generated approximately $12 million in pre-tax income for Tenet during the year ended June 30, according to Tenet.
Still, divesting from the money-making hospitals will likely be a “positive” for Tenet, according to a note from Jefferies published Monday.
The deal is favorable for Tenet both in the short term and moving into 2025, assuming the company uses the expected $790 million in after-tax proceeds to pay down long-term debt, according to the analysts.
It also offers further evidence Tenet is rebalancing its portfolio to focus more heavily on ambulatory surgery centers, according to Jefferies analysts.
Tenet has interest in 520 ambulatory surgery centers and 24 surgical hospitals in 38 states.
During the company’s most recent earnings call, Sutaria said the company’s top capital expenditure priority was expanding “low-cost, high-quality ambulatory surgical centers,” noting their potential for sustainable growth. Tenet’s ASC arm delivered strong second-quarter results, including same-store revenue growth of 7% and EBITDA growth of 20.8% compared to the prior-year period.
Credit rating agency Fitch Ratings upwardly revised Tenet’s credit outlook to positive in March. The ratings agency said Tenet’s string of hospital sales and solid returns from its ambulatory surgery center portfolio drove the change.
The ratings agency said moving forward it will watch how Tenet allocates proceeds from deals such as the Alabama hospital sale.
“Whether Tenet intends to stay at these improved leverage levels will be a key factor in resolving the Positive Outlook and Fitch will observe how the company deploys the pending divestiture proceeds and allocates cash flow in future periods,” the agency said.
