At a time when some not-for-profit hospitals are struggling to remain afloat, investor-owned chains are waiting in the wings to swoop down, pick them up and turn them around.
Last week, Tenet Healthcare Corp. signed an agreement to purchase an ailing hospital outside Atlanta that had filed for bankruptcy protection 10 months ago. Consummation of the deal depends on whether any competing bidders show up for an upcoming auction and whether the U.S. Bankruptcy Court in Atlanta sanctions the transaction.
What the hospital sees as the only way out of financial turmoil, Tenet sees as a way to beef up its market presence and to return a facility to profitability. The Santa Barbara, Calif.-based chain of 110 hospitals has been on a strong earnings streak that has enabled it to scour the landscape for acquisitions in core markets like Atlanta, where it already has four hospitals.
"We've been watching this hospital as it's gone into bankruptcy," said Gary Hopkins, a Tenet spokesman. "It matches the criteria that we have for potential acquisitions. It's in a major market, and it would be a great addition to the hospitals that we operate in the Atlanta area."
Tenet struck a deal to purchase 369-bed South Fulton Medical Center in East Point, Ga., for $17 million in cash and the assumption of certain liabilities, according to a U.S. Bankruptcy Court filing. Because Tenet is not purchasing the hospital's accounts receivables, valued at $10 million to $15 million, and because of other adjustments, the deal is actually worth $30 million to $35 million, said Matthew Levin, a lawyer representing the hospital.
The hospital's not-for-profit parent, Georgia International Health Alliance, filed for Chapter 11 bankruptcy protection in April 2000. At the time, the company said it was entering bankruptcy court to facilitate a sale to an undisclosed for-profit company (May 1, 2000, p. 4).
That original suitor, according to a source familiar with the negotiations who requested anonymity, was Nashville-based Vanguard Health Systems, another investor-owned chain. Charles Martin Jr., Vanguard's chairman, president and chief executive officer, confirmed that the company looked at the hospital, but he would not elaborate or discuss whether Vanguard might make another bid during the as-yet unscheduled bankruptcy auction.
Tenet and Vanguard were the principal players in a much larger bankruptcy deal in 1998, when Allegheny Health, Education and Research Foundation was divesting its eight Philadelphia-area hospitals. Tenet made the winning $345 million bid and now has a significant presence in the Philadelphia market.
South Fulton's parent filed for protection under a section of the U.S. Bankruptcy Code that lets a business sell assets without going through a lengthy voluntary reorganization process. At the time of the filing last April, the hospital had total assets of $68.1 million and liabilities of $71.6 million, said Michael Ayres, the hospital's current chief financial officer.
For the year ended June 30, 2000, Georgia International Health Alliance posted a net loss of $8.9 million and an operating loss of $9.2 million on net revenue of $90.1 million, according to unaudited figures from Ayres.
Since that time, however, the hospital has tried to reorganize, cutting $20 million in annual expenses and laying off 200 people. Since October 2000, the parent company has been in the black, although only slightly.
Kevin Bloye, spokesman for the Georgia Hospital Association in Marietta, said there has not been much acquisition activity in Georgia, but during the past two years four acute-care hospitals have shut down. The Atlanta market is particularly competitive, Bloye said, as for-profit Tenet and HCA-The Healthcare Co., as well as some not-for-profits, have carved up the area.
"I think they're in good hands with Tenet," he said of South Fulton Medical Center. "They've been searching for a buyer for several months, and I think hopefully a company like Tenet will be able to turn that around."
Tenet is just one of several companies willing to head to bankruptcy court for potential acquisitions (See story, p. 4).
"We believe as a company that we have developed an expertise in turning around hospitals and networks of hospitals that have had problems like that," Hopkins said. "I think we have demonstrated that in Philadelphia, the reason being that we have excellent access to capital and we have pretty extensive management expertise that is needed for situations like that."