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Distressed Assets May Jeopardize Autonomy During the M&A Process

The healthcare industry is witnessing a great deal of change including the pace and form of its merger and acquisition activity. Often healthcare transactions are positive and offer hospitals supplementary resources. For this reason, many hospitals and health systems look to mergers or affiliations in order to increase care coordination or ensure financial sustainability. However, there are some instances where hospitals turn to transactions to as a reaction to financial insolvency. According to Thomas Jeffry, a partner in the healthcare and life sciences practice groups of Arent Fox, a law firm with emphasis on life sciences, real estate and finance, a transaction becomes very difficult and complicated when a hospital has severe financial trouble or declares bankruptcy prior to a transaction.

"I am not saying that hospitals can't or shouldn't consider a merger or acquisition with a financially distressed or bankrupt hospital, but a transaction dealing with distressed assets or bankruptcy will often occur at an accelerated pace which will make it challenging. If there is a bidding war, there will be less than ideal circumstances for the acquiring party to conduct due diligence," says Mr. Jeffry.

While a transaction is a viable option for a financially challenged organization, recent examples show that distressed assets may hurt a hospital's chance for freedom of choice in the transaction process. If possible, a hospital may want to consider a partnership or affiliation more proactively — before its financial situation becomes dire — to minimize the potential for barriers.

Christ Hospital in Jersey City, N.J.
Over the past few years, Christ Hospital has undergone a search for a partner that resulted in a great deal of complexity, and ultimately, a loss of control over the outcome. Christ Hospital began looking for a partner in 2011 to strengthen its operations because it was struggling financially. It had lost $4 million dollars in the previous year. In July 2011, Prime Healthcare in Ontario, Calif., announced it intended to acquire Christ Hospital. The proposed deal received a lot of negative feedback from the community and the Jersey City Council — an acquisition by Prime Healthcare would have converted Christ Hospital into a for-profit entity. Citing political forces, Prime Healthcare withdrew its bid to acquire Christ Hospital in February 2012, which left Christ Hospital still financially distraught and without a promise of $30 million in capital investments.

Prime Healthcare was not the only interested potential partner for Christ Hospital. Jersey City (N.J.) Medical Center and Hudson Holdco, a real estate development company in Pennsylvania that owns Hoboken (N.J.) University Medical Center and Bayonne (N.J.) Medical Center, had submitted proposals. However, Christ Hospital did not choose among the potential partners and filed for Chapter 11 bankruptcy in February 2012. As a bankrupt entity, Christ Hospital forfeited the power to choose its partner or acquirer, and in March, an auction was held for the hospital. Hudson Holdco and Jersey City Medical Center both bid. After two days of discussion, a U.S. bankruptcy court judge accepted the $43 million bid from Hudson Holdco.

Cheboygan (Mich.) Memorial Hospital

Similar to Christ Hospital, Cheboygan Memorial Hospital's distressed assets brought it a complicated M&A experience. After cutting $4 million a year in healthcare services, Cheboygan Memorial began pursuing a transaction in January 2010. The hospital discussed an acquisition with Michigan Rural Healthcare Preservation, a non-profit in the area; however, the deal fell through for undisclosed reasons. Cheboygan Memorial filed for Chapter 11 bankruptcy protection in March 2012. Due to the state of Cheboygan Memorial's finances, McLaren Health Care in Flint, Mich., provided Cheboygan Memorial an interim bridge loan so the hospital would not close. A few weeks later, Cheboygan Memorial proposed an expedited sale to McLaren Health. The U.S. Federal Bankruptcy Court for the Eastern District of Michigan approved the sale with a closing date of April 3. However, the sale halted a few days before the closing date because CMS would not grant McLaren Health a waiver to operate Cheboygan Memorial's emergency services and outpatient surgeries without the proper recertification and licensures. Only budgeted to operate until April 3, Cheboygan Memorial was forced to close. At the time, the future of Cheboygan Memorial was uncertain, but executives from both organizations agreed to continue pursuing the sale. After a month of negotiations, the sale completed on May 2 when McLaren Health came to an administrative agreement with CMS, and the U.S. Bankruptcy Court removed all impediments to the sale.

The Christ Hospital and Cheboygan Memorial Hospital deals illustrate the complexity that may accompany transactions dealing with distressed assets and bankruptcy. Both hospitals began pursuing acquisitions only shortly before filing bankruptcy, and in both situations, the hospitals ultimately lost control of the transaction process. Additionally, the likelihood of either hospital completing their transactions to continue offering healthcare services to their respective communities was uncertain.

These two hospitals are not the first to engage in a transaction in the face of financial losses and bankruptcy, nor will they be the last. Proactively engaging in hospital transactions may more firmly guarantee hospital officials the autonomy to choose partners, dictate terms and see a transaction finalize.

More Articles on Hospital Transactions:

Uncertain State Approval a Growing Concern for For-Profit, Non-Profit Healthcare Transactions
4 Steps to Kick Off a Successful Transaction Process
5 Elements Private Equity Firms Consider for Potential Healthcare Transactions


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