Care New England's CEO appeared to reject a turnaround firm's $550 million buyout offer Tuesday, saying that its ongoing merger talks bar discussion with other would-be suitors.
The Providence, R.I.-based health system is the second to swiftly rebuff StoneBridge Healthcare's advances. Erlanger Health System in Chattanooga, Tenn. responded to the turnaround firm's offer in August by declaring itself "not for sale."
StoneBridge offered to buy Providence, R.I.-based Care New England for $250 million, plus put another $300 million toward capital improvements over six years and fully fund the system's pension plan at closing. For its part, Care New England has for months been trying to ressurect a planned merger with Lifespan, but regulators aren't likely to approve the deal as-is.
Care New England CEO Dr. James Fanale didn't mention StoneBridge directly in his statement Tuesday, but said it's "abundantly clear" that the best plan for Rhode Island's healthcare future is the academic health system that Care New England and Lifespan would create, with Brown University as an affiliate.
"The merger conversations we've embarked on are the right ones, and they will continue expeditiously and exclusively," he said. The statement went on to repeat and underline the word "exclusively," emphasizing that the systems' Sept. 15 letter of intent bars fielding other offers.
That's not the response StoneBridge CEO Joshua Nemzoff was hoping for. Nemzoff said Tuesday he hasn't spoken directly with Care New England leaders, but doubts its board has met to discuss the offer. Nemzoff said he doesn't believe Fanale has the authority to reject it on his own.
"If I were in their shoes, I would take a very serious look at our offer and I think the board has a fiduciary responsibility to do that," he said.
The COVID-19 pandemic has significantly weakened many health systems' finances, making them ripe for acquisition by outside firms that use money from private equity firms and other sources to hopefully make them profitable.
StoneBridge is a new such turnaround firm based in New Hope, Pa. whose team includes a handful of ex-Tenet Healthcare executives. Nemzoff said StoneBridge has secured funding commitments from up to seven different sources, including private equity, a real estate investment trust, debt and others.
A Care New England spokeswoman did not say whether the health system is officially turning StoneBridge down.
Care New England reported a $28 million operating loss on $1.1 billion in revenue in its fiscal 2020, which ended Sept. 30, 2020, a 2.5% loss margin. That's a significant swing from its $3.8 million operating gain on $1.1 billion in revenue in fiscal 2019. The health system said the COVID-19 pandemic upended its operations. Even though the state didn't see a significant surge in cases, Care New England's discharges fell almost 18% year-over-year in the quarter ended Sept. 30, 2020.
Nemzoff said he thinks better management would right the ship. Having followed the system's financial results for years, he said leaders need to better track overtime and contract labor and fix revenue cycle and supply chain problems. StoneBridge's $300 million capital infusion would also help, he said.
"A billion-dollar hospital system with 30% market share should be doing a lot better than this hospital is doing," Nemzoff said.
Care New England plans to reach a definitive agreement on the Lifespan merger in January 2021, according to its latest financial statement.
StoneBridge also is also trying to convince Erlanger Health System to accept its $475 million buy-out offer from August. Under that deal, StoneBridge would pay $200 million for the system's six acute-care hospitals and affiliated operations and commit $275 million toward capital improvement and to fully fund its $80 million pension shortfall. A spokeswoman for Erlanger said the health system's position has not changed since August, when it issued a news release declaring, "Erlanger is not for sale."
Erlanger generated $12.6 million in operating income on $278.7 million in revenue in the quarter ended Sept. 30, 2020, a 4.5% margin. That's compared with a $3.2 million operating loss on $270.3 million in revenue in the prior-year period. That's despite a 13% year-over-yearS dip in admissions due to the pandemic.
Nemzoff said he suspects the health system is struggling more than it is letting on.
"Eventually I think they're going to come around and start talking to us because I think they're going to realize that they're running out of cash," he said.