The Daughters of Charity Health System in Northern California is seeing new interest from potential suitors after Prime Healthcare Services walked away from its controversial deal to acquire the six-hospital system.
Prime withdrew from the $843 million acquisition deal on March 10, citing “onerous and unprecedented conditions.” The more than 300 terms required by California Attorney General Kamala Harris filled 78 pages and, in some cases, far exceeded the original deal agreement, said Dr. Prem Reddy, Prime's CEO, in a written statement.
The acquisition would have been the largest deal to date for the 34-hospital Ontario, Calif.-based chain, which has nationwide ambitions but has grown so far by adding just one or two hospitals at a time. It also was the largest transaction ever reviewed by the California attorney general's office.
Daughters CEO Robert Issai initially expressed anger about Prime's withdrawal, saying he strongly disagreed with Prime's position on the attorney general's conditions. He was quoted in the San Francisco Business Times warning Reddy that, “You'll probably never be approved for another acquisition in California.”
But Thursday, two days after the deal's collapse, Issai was upbeat about the sales process. He said he has received numerous calls from interested parties and is contacting more groups that might be interested in an acquisition. “We've been pleasantly surprised about the level of interest that's out there,” he said.
The other interested parties include health systems and a major medical group that has partnered with insurers, he said. The original field from which Prime was selected included hospital operating companies and private investor groups.
Los Altos Hills, Calif.-based Daughters, which had warned of a deteriorating financial condition in its most-recent earnings report, more recently has seen a $90 million increase in net worth due to provider-fee revenue as well as cost containment efforts, Issai said. It's also in a better position than it was a few months ago thanks to revenue from the California provider-fee program, which supports hospitals that treat a large number of Medi-Cal patients. Still, “We're not out of the woods,” Issai cautioned.
The Service Employees International Union-United Healthcare Workers West, which represents 2,600 Daughters employees and fought Prime's bid for the system, said other parties remain interested in purchasing one or two of the hospitals.
In response, Issai said Daughters is “open to all opportunities and all eventualities.” But he noted that if the system breaks up, it would be subject to a multiemployer pension plan breakup fee that would exceed $200 million.
It's unclear whether any of the former bidders are still in the running. The SEIU had supported the bid of Blue Wolf Capital Partners, a private-equity firm. “We remain strongly interested in playing any constructive role that utilizes our investment capital and healthcare and restructuring expertise to resolve the challenges facing the system and create a stable healthcare provider for the communities and workers who rely on these vital safety net institutions,” the private-equity firm said in a written statement.
Daughters has sued the union and Blue Wolf for allegedly conspiring to block the Prime deal.
Attorney General Harris, who blasted Prime for backing out of the deal, appeared to close the door on reconsidering her conditions. The approval terms included the requirement to maintain the majority of services at Daughters' hospitals for 10 years, or twice as long as Prime had committed to in the takeover agreement. The conditions also required Prime to maintain current insurance contracts, which the chain argued were well below fair-market value and neighboring hospital rates.
“Prime is choosing to walk away from this transaction after publicly stating that it had no issue with the 10-year conditions and intended not to close any of the hospitals or end essential services,” Harris said in a written statement. “By walking away, Prime is confirming many of the concerns heard at multiple community meetings that the continuity of vital healthcare services in these communities is not its priority.”
The transaction agreement allows Daughters to receive a $5 million termination fee from Prime if the chain walks away due to unacceptable conditions from the attorney general.
The $843 million price tag included a $394 million cash consideration and $449 million for the assumption of the system's debt. Prime also pledged to fund the system's pension plan, including $280 million in underfunded liabilities.
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