Caritas Christi, Detroit Medical Center turn to for-profit partners to deliver the cash they need to modernize and compete
Two not-for-profit systems that badly needed access to capital found saviors in for-profit investors. Detroit Medical Center and Caritas Christi Health Care see the moves as the best way for them to survive in an increasingly competitive environment. “Having scale and capital access help with changes in payment and delivery reform, which we think will be addressed over the next several years,” says Keith Pitts, left, of Vanguard, which is making the offer for DMC.
Caritas Christi Health Care in Boston and Detroit Medical Center are like formerly broken-down cars that run again, but are stuck in third gear.
Both systems have turned around their operations after struggling financially. Neither system, however, can shift into fourth and fifth gears to accelerate to the highway speeds required to compete with the better-capitalized systems in their markets.
So these not-for-profit systems turned to two very different forprofit mechanics to repair those transmissions. Cerberus Capital Management and Vanguard Health Systems have agreed to supply the transmission fluid—hundreds of millions of dollars in capital—to lubricate those faulty gear boxes. Their capital also will remove some heavy weights that Caritas Christi and DMC have been hauling around: their underfunded pension plans. Cerberus announced its Caritas Christi offer, valued at $830 million to $850 million, on March 25; Vanguard announced its DMC offer, valued at $1.27 billion, on March 19.
“I see the events of the last two weeks as transformative,” said David Cyganowski, co-head of healthcare investment banking and a managing director at Citigroup. “I’ve been in the business since 1982, and it’s hard to remember a couple of weeks like this, both in terms of the healthcare reform law and these deals.”
At the same time, some of deals that for-profit hospital companies and deal advisers have been alluding to for months are starting to come to fruition, with four potential deals announced within the space of 24 hours last week. And not-for-profit hospitals aren’t just targets—they are also acquirers (See related story, p. 7).
Josh Nemzoff, a transactions consultant to not-for-profit hospitals, said both for-profits and not-forprofits are looking to make acquisitions, but, “It’s always hard to tell if this is the leading edge of a wave.”
Keith Pitts, vice chairman of Nashvillebased Vanguard, noted that in 2003, Vanguard and HCA made large acquisitions of not-for-profit systems based in San Antonio and Kansas City, Mo., respectively, that seemed to be the start of something big, and then that was it for acquisitions of big taxexempt systems until these deals.
For years, capital availability to fund plant, equipment and technology investments has been the crucial question for not-for-profit hospital boards considering whether to sell their hospital or system. The tighter credit conditions that have prevailed since about the middle of 2007 have only exacerbated that long-standing trend, healthcare transactions advisers said.
The time is now
Not-for-profits seem to recognize that they need to decide pretty soon whether their capital access will meet their needs, Citigroup’s Cyganowski said. Systems with sufficient cash reserves, good management teams and high bond ratings will be able to remain independent, he said: “Those that are less fortunate—they’re looking to become part of something bigger.”
In significant not-for-profit conversions like these two deals, said Carsten Beith, a healthcare investment banker with Cain Bros., which advised Caritas Christi on its deal, “Capital is almost always the primary driver.” He added, “There isn’t a system in the country that isn’t capital-constrained. You don’t need to be a distressed hospital to come to the conclusion that a transaction might be in the
Caritas Christi and Detroit Medical Center saw an infusion of cash from for-profit investors as a lifesaver for their hospitals.
Cyganowski: “I see the events of the last two weeks as transformative.”