Adventist Health System, Winter Park, Fla., has paid $10 million for the option to buy out PorterCare Adventist Health's nearly one-third stake in nine-hospital Centura Health, Denver.
The transaction gives 32-hospital Adventist Health the right to absorb PorterCare's assets and liabilities anytime during the next five years. The deal was completed April 1, but neither system publicized the deal at the time.
PorterCare, a regional Adventist not-for-profit corporation, owns 30% of Centura's assets. Denver-based Catholic Health Initiatives, the nation's second-largest private not-for-profit system, owns the other 70%.
"For a not very huge price tag it gives us the option to participate in (the Denver) market," said Richard Reiner, Adventist Health's executive vice president.
If Adventist Health exercises the option, the market would be the system's westernmost outpost.
Adventist recently signed a deal to add four Florida hospitals to its roster (June 5, p. 24), but the Denver deal isn't part of an aggressive expansion, Reiner said.
Denver-based PorterCare approached Adventist Health more than a year ago for help overseeing the Centura operations, which had lost $12 million in the six months ended Dec. 31, 1998, but earned $11.5 million in the six months ended Dec. 31, 1999, according to a March report by Moody's Investors Service.
Despite the improvement, Adventist Health doesn't plan to exercise the takeover option until Centura has regained long-term profitability, Reiner said.
"They don't want to dilute their credit rating right now," said Martin Arrick, healthcare analyst for Standard and Poor's, which rates Adventist an A- and last week raised the credit rating on PorterCare to BB from BB-.
The deal gave Adventist Health three of PorterCare's five seats on the Centura board. CHI also controls five board seats. A revised joint operating agreement gives the Centura board veto power on any significant Centura initiative.
Poor oversight under the original agreement had allowed Centura to proceed unilaterally with a $37 million loan to doctor-owned Precedent Hospital, Denver, in 1998, Arrick said. That money was lost when Precedent filed for bankruptcy and closed the following year.
Arrick said the outlook for Centura, which comprises all of PorterCare's hospitals, continues to improve.
"I think they have pulled back from the brink, and the rating upgrade reflects our belief that they've really brought this thing back," he said.
Joseph Swedish, who as Centura's president and chief executive officer engineered a turnaround through aggressive dispositions of the system's nonhospital businesses, said Adventist's arrival adds balance to Centura's governance as well as cash for capital expenses.
"Aligning with a larger system puts (PorterCare) at parity with CHI in terms of accessing services, economies of scale and excellence in management in terms of strategic planning," he said.