It's not every day that a maker of ironing boards wants to buy hospitals, but one consumer products company said last week that that's what it wants to do.
Krug International Corp., a publicly traded company that also makes children's automobile seats, is plunging into the hospital business with plans to buy six of seven hospitals owned by privately held NetCare Health Systems of Nashville for $32 million.
Krug is based in Atlanta, although it operates subsidiaries that manufacture products in Europe. In February, Krug created a subsidiary called SunLink Healthcare Corp., also based in Atlanta, that it intends to run as a for-profit rural hospital chain. The NetCare hospitals would be SunLink's first holdings.
The sale is expected to close in January but is subject to the execution of a definitive agreement, agreements on financing and regulatory approvals.
The company would not disclose its sources of financing except to note that they include internal funds, debt financing and assumption of liabilities.
Krug reported a net loss of $585,000 for its second quarter ended Sept. 30, compared with a loss of $165,000 in last year's second quarter. Its total revenue was almost $7 million, down from $8 million in the year-ago quarter. Its subsidiaries manufacture and distribute housewares and child safety products. In 1998 it sold a leisure marine business, and in 1999 it sold a government contract business. The company also hopes to sell its child safety subsidiary, called Klippan, soon.
Krug Chairman and Chief Executive Officer Robert Thornton Jr., 52, is also chairman and CEO of SunLink. He was asked to join Krug specifically to move the company toward healthcare and away from consumer products, he said. He was chief financial officer of National Healthcare, a for-profit hospital chain formed in the mid-1980s that later changed its name to Hallmark Healthcare Corp. and then was president of 18-hospital Hallmark, based in Atlanta, when Community Health Systems bought it for $161 million in 1994.
He said he didn't know of another example of a publicly traded nonhealthcare company setting up a subsidiary to buy hospitals.
"It's a little unusual," he said. "The purpose here is to redirect Krug into the healthcare business, not to operate a healthcare division of a consumer products company."
The deal would transfer ownership of all but one of the hospitals owned by NetCare to SunLink. They are:
* Forty-five-bed Chilton Medical Center, Clanton, Ala.* Forty-nine-bed Chestatee Regional Hospital, Dahlonega, Ga.
* Forty-bed Mountainside Medical Center and Nursing Center, Jasper, Ga.
* Fifty-bed North Georgia Medical Center, Ellijay, Ga.
* Eighty-four-bed Trace Regional Hospital, Houston, Miss.
* Forty-eight-bed Dexter (Mo.) Memorial Hospital.
The company plans to retain the hospitals' current management teams.
It is unclear what would happen to the one NetCare hospital not part of the deal: 71-bed San Clemente (Calif.) Hospital and Medical Center. That hospital's CEO, Patricia Wolfram, said a group of 13 local physicians is negotiating with NetCare to purchase the hospital in a deal expected to close by the end of this month.
Officials from NetCare didn't return telephone calls for comment.
Earlier this year, NetCare sold its three largest hospitals. Triad Hospitals, Dallas, bought 110-bed Denton (Texas) Community Hospital and 122-bed Greenbrier Valley Medical Center in Ronceverte, W.Va. Triad also bought 132-bed Davis Medical Center in Statesville, N.C., from NetCare but immediately sold it to Health Management Associates of Naples, Fla.
There had been speculation for the past year that NetCare was trying to sell the rest of its hospitals.
According to sources, NetCare CEO Michael Koban Jr. and another company official had made an offer to buy out the company but were outbid by SunLink.
Charles Nasem, CEO of Trace Regional Hospital, and Chuck Adams, CEO of Chestatee Regional, both said they were looking forward to increased stability at their hospitals if the deal goes through as planned.
"We started hearing rumblings right after the first of the year," said Adams. "It adds a lot of uncertainty and an air of instability not only about the company, but at the local level at the hospital; your physicians and your employees are concerned."
Thornton said the hospital management business can be a profitable one and that the NetCare deal would increase the company's value to its shareholders.
Though the NetCare facilities will need an infusion of capital, five of the six are the only hospitals in their counties, and two of them were owned by National Healthcare at one time.
"I think we're in a cycle where rural hospitals are more in favor," Thornton said. "We think that the price and the terms are right."