(Reuters) - Tenet Healthcare Corp. on Monday said it would become the largest U.S. provider of outpatient surgery services through a joint venture with United Surgical Partners International and expects to fully own the company within five years.
More medical procedures are being performed on an outpatient basis as technology improves, thus lowering costs by allowing patients to go home sooner.
Tenet's shares rose 5.4 percent to $52.32 in midday trading, as investors applauded the move into an area of healthcare that is seeing faster growth and higher margins.
Tenet, the third-largest U.S. hospital operator, said it will pay $425 million to private equity firm Welsh, Carson, Anderson & Stowe and other USPI shareholders and assume $1.5 billion of USPI's debt for a 50.1 percent stake in the venture.
The company will have 244 ambulatory surgery centers, 16 short-stay surgical hospitals and 20 imaging centers in 29 states.
Tenet's move comes as more Americans obtain health insurance under the Affordable Care Act through government-run marketplaces and an expansion of the Medicaid program for the poor. As healthcare providers gain more insured patients, federal subsidies to hospitals are being scaled back.
"The purchase of USPI, which is a quality ambulatory surgery center asset, gives them a good growth driver to offset the pressures of backloaded reimbursement cuts with Obamacare," said Leerink Partners analyst Ana Gupte.
Ambulatory, or outpatient, surgery allows patients to return home on the same day a procedure is performed.
Other large hospital operators are likely to follow suit and look to expand in the faster-growth outpatient sector, Gupte said.
Tenet rival HCA Holdings Inc, the country's largest hospital chain, currently operates 113 freestanding surgery centers.
United Surgical's competitors include Amsurg Corp and Surgical Care Affiliates Inc.
United Surgical was not initially looking for a buyer, said Tenet Chief Executive Trevor Fetter.
"It wasn't for sale. This is a way for us to create a structure where ultimately we have the ability to own the whole company but we don't need to do that from the beginning," Fetter said in an interview.
The joint venture with United Surgical also allows Tenet to pay down debt over time.
"You should expect to see the joint venture structure more often in the healthcare business," Fetter said.
Tenet also will buy Aspen Healthcare from Welsh Carson for about $215 million in cash to enter the UK short-stay surgery market.
Tenet said it plans to raise $2.2 billion in debt to fund the two transactions, which are expected to close by the third quarter. It expects the deal to be neutral to its earnings this year and add to profit in 2016.
J.P. Morgan and Lazard are Tenet's financial advisers and Gibson, Dunn & Crutcher is its legal counsel.
USPI and Aspen are being advised by Barclays and Goldman Sachs. USPI's legal adviser is Ropes & Gray LLP.