Monday, November 15, 2010

Hell Hound Cerberus Gets Vatican & AG Blessing


Cerberus Capital Management acquired Caritas Christi Health System with the blessing of the Vatican, the Boston Archdiocese, and Massachusetts Attorney General Martha Coakley.  Coakley looked for conflicts of interest.  Here's what she found:

The Board and Senior Management appropriately disclosed and managed conflicts of interest that existed.  Members of the Board and Senior Management had no existing financial interests or business relationships with Cerberus.

The Steward Board has six of seven slots occupied by private equity underwriters (PEU's).  For-profit firms typically pay board members, some handsomely.  Board members often are required to hold equity in the firm.

PEU's entice senior management with future pay.  While they claim such pay is "performance based," the big payday comes when Cerberus flips Caritas Christi.  For senior management to participate, they must hold an equity stake.

Any incentive compensation granted to any members of the senior management team by Steward will be designed so as to reward individuals based on post-Closing  performance.
Surely the hell hound hinted to senior managers as to their future pot of gold?

The government of Massachusetts couldn't compel Cerberus to make clear their resources.

As Cerberus is privately held, its true size and the magnitude of its resources cannot be independently verified.

Cerberus pays an external auditing firm, does it not?  One might expect that kind of independent verification from a firm buying the largest nonprofit community hospital system in New England.

State and local governments expect to collect as much as "$100 million in taxes over the next four to five years."  The Attorney General's office received $1.5 million to conduct assessments on the impact of the acquisition over time. 

Caritas' pension plans have been frozen for some time.  While underfunded by as much as $225 million, they have assets.  The size was never stated in any documents.

Purchaser shall have significant input into the selection of asset managers for Pension Assets

Given Cerberus sells to pension funds, what can they do with a captive pension, one now insured by the feds?

PEU's are infamous for management fees and dividend bleeding.  Neither are prohibited under the agreement.

Sellers and Purchaser shall enter into a management services agreement in a form reasonably satisfactory to Purchaser.
It remains how much Cerberus charges for oversight.  It will take an S-1 to find out.  An IPO could come in three years.

There are many twists and turns to the Caritas-Ceberus deal.  Note:  Martha Coakley found Caritas Christi unsustainable, three years into Massachusetts health reform.  What does this say about stressed safety net hospitals, given Uncle Sam's help doesn't arrive in earnest until 2014?

America's health care future has a distinct PEU odor.  Uncle Sam, state governments, even the Vatican, don't mind the smell.