Legacys financial backersprivate equity firm CCMP Capital Advisors and the Canada Pension Plan Investment Boardagreed that it would be important to have these executives on the board for their experience and insight regarding not-for-profit hospitals.
CCMP and the Canadian pension board have made small initial investments, but have committed to make up to $500 million in equity available to Legacy as the company needs the funds to make deals, said Nancy-Ann DeParle, a managing director with CCMP. DeParle is also a former administrator of the Health Care Financing Administration, now known as the CMS, and was a Triad director. The management team also holds a stake in Legacy.
CCMP was one of two private-equity firms that joined Triad management in a $6.4 billion deal announced in February 2007 to take the company private. Community Health Systems, Franklin, Tenn., trumped that deal a month later, leaving the Triad management team without a company to run once the deal was completed.
Just as important as the governance is the investment horizon. Triad was criticized sharply in its last year by a major shareholder, TPG-Axon Capital Management, which wanted the company to spend less on costly acquisitions and improve margins at its existing facilities. That impatience was a factor in Triads attempt to take the company private. With Legacy, that wont be a problem. We dont have a timeline for this company, DeParle said. We have a vision that Denny and Dan have articulated and the sponsors support.
The Legacy team believes that there are hundreds of not-for-profit hospitals that find capital scarce, even with good operating results, and would consider a joint venture to provide that capital. (See Modern Healthcares 14th annual report on mergers and acquisitions for more on how the capital crunch may affect dealmaking in 2008, p. 22.) Michael Trey Crabb, a managing director at Avondale Partners and co-head of its healthcare investment banking unit, sees opportunity, too, especially because Legacy differs from other for-profit companies in its willingness to do joint ventures.
I think most of the rest of the market doesnt see the same value there, Crabb said. Since Ive had some experience working with these guys directly, I think its potentially a very effective strategy for Legacy to pursue. Crabb advised Deaconess Hospital of Oklahoma City when it negotiated a joint venture with Triad.
Not-for-profit hospital board members often find it hard to come to the decision to sell, and a joint venture perhaps cushions the blow, Crabb added. Many times, a not-for-profit wants to retain some input and control in how health services are being delivered in their community, and this is a way to do that, he said. The not-for-profit system has to maintain certain types of controls over the operation of the joint venture, as spelled out in the federal tax-exemption case won by
St. Davids HealthCare System, Austin, Texas, in 2004, Crabb said.
Before getting down to new business, however, Shelton has one piece of old business to deal with: the three-year noncompete clause that was in his final employment contract with Triad Hospitals. Shelton said his personal legal counsel advised him that the clause prohibits competing in markets where Triad had a facility. Legacy will stay out of those markets for three years from July 25, 2007the date Community completed its acquisition of Triad, Shelton and Moen said.
Shelton emphasized that he is a nonexecutive chairman who wont have a day-to-day role in managing the company. I see my role, with Nancy-Ann and other members of the board, is to work on governance and hold everyones feet to the fire on culture, Shelton said.
Whether that will be enough to satisfy the conditions of the noncompete clause is an open legal question, said Stephen Fox, a labor and employment lawyer with Fish & Richardson in Dallas. The clause raises two questions, Fox said: Is nonexecutive chairman a position that is covered by the clause? And, if yes, how is the geographic area in which Triad did business, and in which Shelton is restricted, defined?
As a practical matter, Fox said, These kinds of restraints are absolutely invitations to get competing parties to the bargaining table. An agreement will contain them in the hope that when one threatens to enforce the restraints, the other side will say, Lets not fight about this. Lets come up with a business solution in the boardroom, and not in the courtroom.