Who will buy Daughters of Charity? Breaking down the suitors

With Prime's deal dead, and bankruptcy on the horizon, Daughters of Charity executives have several options for possible new deals, including many of the original bidders.

The Daughters of Charity Health System in California is teetering on the edge of bankruptcy unless a new buyer emerges. But just who plans to rescue the system is still a big unknown.

Several for-profit or even regional health systems could take over Daughters of Charity after for-profit chain Prime Healthcare Services declined to pursue an $843 million takeover of the system after the California attorney general added 300 requirements to the sale, among them that all six hospitals are kept open for 10 years.

[Also: Daughters of Charity lays off staff]

Daughters of Charity executives have said they are actvely looking for a buyer, a list that could include several of the original bidders who made a short list from 133 interested buyers.

Prospect Medical Holdings

One potential buyer California-based hospital operator Prospect Medical Holdings, a network of 13 acute care and behavioral hospitals and 40 clinics. Founded in 1996 as a medical group and operating hospitals since 2007, Prospect has been expanding from its West Coast base since it was acquired in 2011 by Leonard Green & Partners, a Los Angeles-based private equity firm, under the leadership of private equity veteran Samuel Lee.

In 2012, Prospect acquired the Nix Health hospital system in San Antonio, Texas, and bought another facility 70 miles away the next year.  Last summer, Prospect entered into what it calls “a unique and innovative partnership” in Rhode Island, a joint venture where it became the majority owner of CharterCARE Health Partners’ two hospitals, Roger Williams Medical Center and Our Lady of Fatima Hospital.

Pending regulatory approval in New Jersey, Prospect is also set to acquire the East Orange General Hospital, just west of Newark, for $84 million. Early in May, Prospect signed a tentative deal to buy the Waterbury Hospital, in Connecticut, on financial terms that were not disclosed.

[Also: Daughters only has 20 days cash on hand, inks union deal]

Prospect Medical scored second behind Prime in the DCHS bid assessment, based on long-term viability and certainty of closing. The estimated value of Prospect’s bid, including the assumption of debt, was $831 million, tied with Prime’s initial bid, though about $12 million below the final one.

Prospect is an “experienced California hospital operator,” and “backed by large investment fund capable of providing necessary resources,” said Daughters of Charity in a board presentation. Prospect also promised $300 million in capital improvements over five years. (Prime’s bid pledged $150 million in capital improvements, pension coverage for about 17,000 workers and retirees, and a commitment to honor union contracts.)

Among Prospects’ weakness were that it “requires the Church Plan to remain with DCHS,” meaning the Daughters’ pension plan would be “funded by a TBD payment from Prospect” at the close of the deal, the board presentation said. It would also have to obtain a capital commitment.

Strategic Global Management

The other runner-up bidder is Strategic Global Management, a California-based for-profit hospital operator whose bid was pegged at $851 million.

Strategic Global operates seven hospitals in Riverside, San Bernardino and Orange County, and is led by the main investor Kali Chaudhuri, MD, an orthopedic surgeon. Chaudhuri, also known as “Doctor C,” is an American immigrant physician from India who became a healthcare entrepreneur, much like Prime founder and CEO Prem Reddy, MD, who was born in rural India, settled in LA’s Inland empire, became a prolific cardiologist and then started running hospitals in the 1990s.

Chaudhuri, through his KPC Group and Strategic Global, has led a number of healthcare and real estate business ventures through various takeovers, including a large medical practice group in California, the hospitals and what in 2003 was the first private medical college in West Bengal, India, the KPC Medical College & Hospital.

[Also: Prime backs out of Daughters deal]

In the past five years, Strategic Global has made $350 million in takeover deals. In 2010, it acquired the Hemet Valley Medical Center and Menifee Valley Medical Center, and in 2012 it purchased the Victor Valley Community Hospital — the same hospital, located in the longtime residence of Reddy, that Prime unsuccessfully tried to acquire in 2011. Prime saw that deal thwarted by a state attorney general too.

DCHS has called Strategic Global an “experienced California hospital operator,” having survived state regulatory review in a number of acquisitions, despite skirmishes with labor unions. It also promised $200 million in capital improvements over five years.

Among Strategic’s weakness were the same two concerns about Prospect — financing the pensions plus capitalization — along with the fact that it has “demonstrated limited experience with transactions of this scale,” DCHS said.

Blue Wolf Capital Partners

One of the other top bidders, Blue Wolf Capital Partners, failed to impress DCHA but is much preferred by labor unions SEIU-Healthcare Workers West and United Nurses Associations of California — partly because it proposed keeping Daughters nonprofit.

A 10-year-old New York-based private equity firm, Blue Wolf is led by co-founder and managing partner Adam Blumenthal, former CFO for New York City’s comptroller office and chairman of the investment committee of the United Auto Worker’s $55  billion retiree health benefit fund. Blue Wolf submitted a bid valued at $803 million, with the added benefits of union support, a $300 million capital improvement investment, likely regulatory approval and financing from GE Capital (although GE Capital is now up for sale).

It scored weaker largely because its ability to maintain the 501(c)(3) status was unclear, it would have “minimal capital invested into operations,” and leave DCHS “thinly capitalized” post-closing absent a deposit,” executives told the DCHS board. As Daughters CEO Robert Issai has said, Blue Wolf also has “zero experience operating hospitals.”

Follow Healthcare Finance on Twitter and LinkedIn.

The extent of Blue Wolf’s healthcare experience include the operation of Healthcare Laundry Systems, the largest healthcare laundry provider in North America, a controlling stake held in an independent pharmacy benefits consulting firm, and a nonprofit joint venture with a struggling NYC hospital launched last year. Blue Wolf partnered with the Mount Sinai-affiliated Brooklyn Hospital Center to set up a nonprofit joint venture to help capitalize a network of urgent care centers throughout the hospital’s service area. A Blue Wolf joint venture also tried unsuccessfully to acquire Long Island College Hospital.

Other privately-held healthcare companies made DCHS’ short list, but decided not to pursue full bids, among them Integrity Health Care, Inc. and Paladin Healthcare Capital.

The others

Then there are a number of large nonprofit health systems that could buy all or some of the Daughters of Charity hospitals and clinics. California systems like Kaiser Permanente, Dignity Health or Providence Health & Services could be suitors, as well as large faith-based networks like Catholic Health Initiatives or Trinity Health. The Santa Clara County government has also proposed the idea of buying the O'Connor and St. Louise hospitals and running them as public facilities.

But as DCHS leaders see it, the health system ideally needs be acquired as a whole, including $400 million in tax-exempt bond and other debt, plus some $300 million in estimated pension needs.

“The liabilities make it difficult to buy individual facilities,” said David Miller, the SEIU-UHW’s assistant to the president for strategic campaigns. “DCHS can’t be pulled apart without triggering the bond debt collateralization and the employee pension obligations.” That would require bankruptcy — exactly what Daughters leaders have long wanted to avoid.

Twitter: @AnthonyBrino