The Health Care M&A Monthly: New Year’s Hospital M&A -
Hospitals Realign In The New York City Metropolitan Area
The start of the New Year continued some themes in the Hospital M&A market that closed the Old Year. One is the reappearance of not-for-profit operators, particularly Roman Catholic hospitals, as a major force in the market, both as buyers and sellers.
Four deals were announced in January involving a total of five hospitals; three of the month’s deals and four of the facilities crucially involved Catholic hospitals. By comparison, December 2006 posted six deals with eight hospitals. Five of those deals, impacting seven hospitals, involved Roman Catholic providers.
January’s lone for-profit deal involved the sale of yet another hospital, 240-bed Graduate Hospital in Philadelphia, by Tenet Healthcare Corp. (NYSE: THC). The buyer is the University of Pennsylvania Health System (UPHS). Once this deal closes, THC will have four hospitals in the southeastern Pennsylvania market, down from an all-time high of eight.
Consistent with the overbedding of acute-care hospitals in urban markets, UPHS is forming a joint venture with Good Sheperd Rehabilitation Network to convert Graduate Hospital and operate it as a facility with 58 rehabilitation and 38 LTAC beds.
Taking A Bite Out of The Big Apple
The New York City metropolitan area illustrates well this flurry of M&A activity. Last month’s issue covered the sale of St. Mary Hospital, a 328-bed facility owned by the Maryland-based Bon Secours Health Care System, to the Municipal Hospital Authority of Hoboken, New Jersey. However, this is not the last divestment contemplated by 15-hospital Bon Secours; it is currently exploring the sale of its two-hospital joint venture with Detroit’s Henry Ford Health System, Bon Secours Cottage Health Services, in which it holds a 70% interest. With these sales, the System hopes to reduce its debt load by $192.0 million.
The transformation of the hospital market in the NYC metro area continued in January. St. Mary’s Hospital, a 188-bed Catholic provider in Passaic, New Jersey, won its $36.7 million bid to buy PBI Regional Medical Center, a 264-bed acute care hospital also in Passaic. In May 2006 Navigant Consulting took over managing the financially distressed PBI; since July 2006, PBI has been operating under bankruptcy protection. The relevant acquisition multiples in this deal are 0.27x revenue and $139,000 per bed. PBI took shape in 2003 when Passaic Beth Israel bought General Hospital Center, both in Passaic, for $35.0 million. At that time, Passaic had three hospitals with an average 60% daily census, and was considered overbedded. Passaic Beth Israel had even floated the idea of acquiring St. Mary’s as early as 1998. Once the current sale closes, St. Mary’s plans to sell its current facilities and move to the PBI campus, which is the site of the former General Hospital Center. Thus, in just eight years, Passaic’s three hospitals have consolidated into one.
In 2005, we reported the bankruptcy reorganization of Saint Vincent Catholic Medical Centers, headquartered in Manhattan. As the largest not-for-profit hospital bankruptcy proceeding in the country draws to a close, New York’s hospital market keeps evolving. Saint Vincent has sold two facilities in Queens, 227-bed St. John’s Queens Hospital and 221-bed Mary Immaculate Hospital, to Caritas Health Care for $40.0 million, or $89,300 per bed. Caritas, the stalking horse bidder in the bankruptcy auction, is owned by 294-bed Wyckoff Heights Medical Center, which straddles Brooklyn and Queens. While administered by Caritas and networked with Wyckoff under the Brooklyn Queens Health Care System, the finances of the two former Saint Vincent facilities are to be structured separately—and prudently—from Wyckhoff’s.
In a second deal, Saint Vincent sold 440-bed St. Vincent’s Staten Island Hospital to Bridge Regional Health System (BRHS), the parent of 278-bed Bayonne Medical Center in New Jersey, for $27.5 million, or $62,500 per bed. The Staten Island facility came under the supervision of BRHS on January 1, with the new name Richmond University Medical Care. Some are put off by the name since the hospital isn’t directly affiliated with a university; BRHS retorted that it is a teaching hospital. In both Saint Vincent deals, the buyers received legal representation from the firm of Proskauer Rose, LLC.
We have seen large hospital operators aspire to a truly national presence only to fracture into smaller, regional operators. New York City, in many respects a microcosm of the country, is seeing citywide systems break up into smaller, locally focused networks borough by borough.
We do not believe for-profit operators will remain absent from the Hospital market for long, however. In a move to strengthen its balance sheet, Health Management Associates (NYSE: HMA) recently announced plans for a recapitalization package. Part of that package is to pay a onetime dividend of $10.00 per share to its equity holders. Another part is to change how it accounts for patient bad debts, a problem that has been plaguing all hospital operators. HMA will record a $200.0 million fourth-quarter charge to increase its reserves for receivables not covered by health insurance, and will start reserving a significant portion of self-payor accounts at the time they are created, rather than waiting 120 days, as was their previous practice. This will resolve problems with overstating receivables and timing issues. And, in the wake of a class-action settlement, HMA is also offering new discounts to the uninsured, which it hopes will lower bad-debt expense. Sheryl Skolnick, senior VP at CRT Capital Group, noted, "There is risk here, in our view, but risk that we think the market likely ignores today." If HMA can weather the static it has been taking in the investment community and bolster its balance sheet with this recapitalization, it may make the company a less likely target for an LBO going forward. And it will strengthen its bargaining position as a potential buyer.
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