Vanguard Health Systems to Acquire Tenet Healthcare for $4.3 Billion (THC, VHS)

Shares of Vanguard Health Systems Inc.VHS were up 64 percent in early trading Monday. According to The Wall Street Journal, Tenet Healthcare Corp. THC had agreed to acquire Vanguard for $21 per share, almost 70 percent above Friday’s closing price of $12.37.

According to Reuters, the deal is expected to close before the end of the year and will cost Tenet $4.3 billion including the assumption of $2.5 billion in Vanguard debt.

Overall, Tenet expects annual savings of $100 million to $200 million and for the transaction to increase earnings in the first year, mostly through geographic expansion, expanded service offerings, and diversified earnings sources, according to Tenet CEO, Trevor Fetter, in a statement released Monday, reported by Reuters.

Fetter also said he expected increased benefits to the company under health care reform. Hospital stocks, in general, have experienced a rally this year, thanks to investors who expect companies to benefit from expanded health care coverage under Obamacare.

Tenet, which has hospitals in California, Texas and the Southeast, will gain coverage by acquiring Vanguard which owns 28 acute care and specialty hospitals in Massachusetts, the Midwest and the Southern U.S.

The combining of Vanguard and Tenet is all part of a broad recent theme of consolidation in health care.

This particular deal caught some analysts off guard. Bloomberg Businessweek reported that Brian Tanquilut, an analyst at Jefferies & Co. in Nashville, Tennessee said, “This was a surprise to most investors. I don’t think the Vanguard asset was speculated on as something that was for sale.” Tanquilut added that people had been focused on Health Management Associates HMA, a hospital operator that had been the subject of takeover speculation of late.

The spike in Vanguard stock contrasts sharply with a decline in equity markets ahead of Monday’s open, according to Investor’s Business Daily. This was due to a drop in bond prices, as well as a selloff in China.

Bonds dropped in anticipation of an eventual pullback in stimulus support from the Fed. The selloff in China came after the country’s central bank indicated there would be no new stimulus that the money supply was tightening, and that interest rates were likely to go up.

Financing for the deal comes from Bank of America BAC Merrill Lynch.

At the time of this writing, Jim Probasco had no position in any mentioned securities.