A year after a deal to sell its interest in the nation's largest operator of psychiatric hospitals fell through, Magellan Health Services is giving it away.
In an agreement announced last week, Magellan said it would give up as much as $60 million in assets and most of its ownership stake in 88-hospital Charter Behavioral Health Systems to Crescent Operating, the Fort Worth, Texas-based diversified management company. The four-way deal also involves Crescent Real Estate Equities, the Fort Worth real estate investment trust from which Charter leases its hospitals.
Magellan would receive no cash or stock in return, spokeswoman Erin Sommers said.
But the deal would allow Atlanta-based Magellan, which would become primarily a behavioral managed-care company, to wash its hands of any fiscal or managerial responsibility for flagging hospital operations.
Under the deal, Magellan would reduce its 50% stake in Alpharetta, Ga.-based Charter to 10%, ceding the balance to Crescent Operating, which owns the other 50% stake.
Crescent Real Estate was founded by Richard Rainwater, who in 1987 co-founded Columbia Hospital Corp. and in 1989 helped engineer its merger with Hospital Corporation of America to form for-profit giant Columbia/HCA Healthcare Corp. Rainwater serves as chairman of Crescent Real Estate and Crescent Operating, which was spun off in 1997.
A private joint venture, Charter does not regularly disclose its finances. But in a report for the year ended Sept. 30, 1998, Charter's independent accountant expressed uncertainty about the company's ability to continue as a going concern, according to a Magellan filing with the Securities and Exchange Commission.
Compounding Charter's financial troubles are a recent spate of closings and reductions in services at several of its hospitals. The modified services were prompted by questions about quality of care.
The deal, which is expected to close in 30 days, cancels Magellan's obligation to provide franchise services to Charter.
Unpaid fees for operation of a toll-free call center and other services amounted to $99.5 million by June 30, Magellan said in a recent SEC filing.
According to the agreement, Magellan would turn over its hospital-based and franchise assets to Charter. Those assets are valued at between $50 million and $60 million, and include the call center, use of the Charter name and toll-free number, and certain treatment protocols. The assets also include six hospital-based joint ventures, four of which are with Columbia.
"It's an outstanding development for Charter," said Charter President and Chief Executive Officer Michael French.
After the closing, Charter management and staff will have an option to buy 30% of the company, he said.
Crescent Real Estate, the owner of Charter's buildings, is the fourth party to the deal.
"It's very simple for us-we are looking for a financially strong tenant who can continue to pay rent," said Chief Financial Officer Jack Tompkins.
The Crescent affiliate has given Charter through December to pay its $3.7 million August rent.
French deferred questions about control of the company until after the transaction closes.
But Sommers confirmed that Magellan would no longer appoint members to Charter's board.
The current deal compares unfavorably with last year's aborted transaction, in which Magellan would have transferred all its interest in Charter to Crescent Operating and all its provider-based assets to Charter for a net gain of $310 million. But that deal, which was called off in August because of Charter's continued losses, would have included more assets than the current deal. Those assets were Magellan's European hospitals, which it sold for $60 million earlier this year, and its group practices, which it plans to sell for $15 million to $20 million, Sommers said.