Lines be­gin to blur be­tween not-for-profit, in­vestor deals

At­tributes of deals by not-for-prof­its, in­vestor-owned chains be­gin to blur

Modern Healthcare - - Front Page - Vince Gal­loro

Are the terms of­fered for hos­pi­tal ac­qui­si­tions by tax-ex­empt and in­vestor-owned or­ga­ni­za­tions con­verg­ing? And if so, is it be­cause these two sub­sec­tors of the hos­pi­tal in­dus­try are grow­ing more alike, or be­cause the pool of hos­pi­tals for sale is chang­ing?

Anu Singh, a se­nior vice pres­i­dent with ad­vi­sory firm Kauf­man Hall, Skokie, Ill., con­tends that deals made by tax-ex­empt and in­vestorowned ac­quir­ers used to be very dis­tinct. Typ­i­cally, in­vestor-owned com­pa­nies wanted to make straight ac­qui­si­tions for cash, and tax­ex­empt sys­tems pur­sued non­cash merg­ers with other tax-ex­empt providers, Singh says.

There were plenty of ex­cep­tions to this rule, of course—in­vestor-owned com­pa­nies pur­sued joint ven­tures with some tax-ex­empt providers (April 3, 2006, p. 6), and a con­sor­tium of tax­ex­empt sys­tems bought 21 hos­pi­tals for $1.2 bil­lion in 1998 from what was then known as Columbia/HCA Health­care Corp. (Nov. 9, 1998, p. 36).

More re­cently, in­vestor-owned and tax­ex­empt ac­quir­ers have been look­ing for what­ever they can do to make their of­fers more at­trac­tive, Singh says. The non­fi­nan­cial terms that Nashville-based Van­guard Health Sys­tems and Bos­ton-based Stew­ard Health Care Sys­tem agreed to last year in ac­quir­ing Detroit Med­i­cal Cen­ter and Car­i­tas Christi Health Care, Bos­ton, sig­naled a move to­ward the ap­proach that tax­ex­empt sys­tems take to deals, Singh con­tends.

“A for-profit might be mak­ing a cap­i­tal com­mit­ment that im­plies keep­ing the fa­cil­i­ties open for years any­way, so why not prom­ise that?” Singh says.

An­other ex­am­ple is the joint ven­ture an­nounced over the win­ter by Duke Univer­sity Health Sys­tem, Durham, N.C., and LifePoint Hos­pi­tals, Brent­wood, Tenn. (Feb. 7, p. 12), Singh says. LifePoint is the ma­jor­ity and man­ag­ing part­ner of Duke LifePoint Health­care, bring­ing its ex­pe­ri­ence in man­ag­ing ru­ral hos­pi­tals and its cap­i­tal ac­cess to the part­ner­ship. Duke brings its clin­i­cal rep­u­ta­tion and its physi­cians to the joint ven­ture, which al­ready has two deals to ac­quire tax-ex­empt hos­pi­tals in North Carolina.

Tax-ex­empt ac­quir­ers re­cently have shown more will­ing­ness to in­clude up­front cash in deals in or­der to meet the ob­jec­tives of sell­ers, Singh says. He cites two ex­am­ples. In March, Trin­ity Health, Novi, Mich., agreed to pay $75 mil­lion to­ward the con­struc­tion of a med­i­cal re­search cen­ter and as­sume some debt in or­der to ac­quire Loy­ola Univer­sity Health Sys­tem, May­wood, Ill., from its cur­rent owner, Loy­ola Univer­sity Chicago (March 7, p. 4). And in Fe­bru­ary, St. Louis-based As­cen­sion Health formed a joint ven­ture with pri­vate-equity firm Oak Hill Cap­i­tal Part­ners to ac­quire cap­i­tal­strapped Catholic hos­pi­tals that don’t want to lose their iden­tity (Feb. 21, p. 6).

There are other ex­am­ples from re­cent months as well. WakeMed Health & Hos­pi­tals, Raleigh, N.C., has made an un­so­licited of­fer to UNC Health Care, Chapel Hill, to buy its Raleigh hos­pi­tal, Rex Health­care, for $875 mil­lion, with about $125 mil­lion of that go­ing to pay off Rex’s debt, ac­cord­ing to WakeMed’s most re­cent of­fer. En­gle­wood, Colo.-based Catholic Health Ini­tia­tives has agreed to pro­vide $320 mil­lion in cash to a yet-to-be-named sys­tem that would com­bine two CHI-af­fil­i­ated sys­tems in Ken­tucky with the Univer­sity of Louisville Hos­pi­tal (June 20, p. 6).

Carsten Beith, man­ag­ing di­rec­tor and co­head of tax-ex­empt hos­pi­tal merg­ers and ac­qui­si­tions for Cain Bros., an in­vest­ment bank, be­lieves it’s not so much the ac­quir­ers but the sell­ers who have changed.

Cain ad­vised Car­i­tas Christi on its deal with Stew­ard, which is owned by pri­vate-equity firm Cer­berus Cap­i­tal Man­age­ment. Beith agrees that the terms were a lit­tle more re­stric­tive on Stew­ard than in many such deals, but sug­gests that was driven more by the na­ture of the Mas­sachusetts at­tor­ney gen­eral’s re­view of the deal. In that state, Beith says, the at­tor­ney gen­eral can con­sider the value of main­tain­ing com­mu­nity ben­e­fits in the fair-mar­ket-value cal­cu­la­tion, so it was worth­while to spell those out in the deal.

Beith ar­gues that it’s the greater fi­nan­cial health of sell­ers that is per­haps driv­ing in­vestorowned and tax-ex­empt ac­quir­ers to more sim­i­lar of­fers. When the sell­ers are not fi­nan­cially dis­tressed, Beith says, “They can de­mand more both fi­nan­cially and non­fi­nan­cially.”

Some boards of seller hos­pi­tals are look­ing for com­mit­ments to in­te­grated de­liv­ery strate­gies, for ex­am­ple, Beith says. Boards are spend­ing more time to un­der­stand the clin­i­cal qual­ity in­fra­struc­ture and physi­cian align­ment strate­gies of po­ten­tial ac­quir­ers, he adds. These goals, es­pe­cially in terms of physi­cian align­ment, are dif­fi­cult for stand­alone hos­pi­tals to achieve on their own be­cause they can­not be fi­nanced with tax-ex­empt bonds, Beith says. Bonds can be is­sued for hard as­sets, such as build­ings or equip­ment, but not for the in­tan­gi­ble as­sets that make up a sig­nif­i­cant part of a physi­cian prac­tice ac­qui­si­tion, he says.

For sell­ers, the con­ver­gence is a boon, Kauf­man’s Singh says. “His­tor­i­cally, a seller may have felt that they were lim­ited by two dif­fer­ent di­ver­gent paths”—out­right sale to an in­vestor-owned com­pany or a non­cash merger with a lo­cal tax-ex­empt sys­tem, Singh says. “Now they can look at more of an ap­ple-toap­ple com­par­i­son. It’s not ex­actly the same, but it’s a lot closer. A seller can see much more eas­ily whether a deal will meet their needs.”

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.