Wednesday, July 13, 2011

Hospital Deal Pricing: Cerberus, KKR and Cressey & Co.

Private equity underwriters (PEU's) are legendary for buying low and selling high.  That applies to hospital beds.  KKR's HCA plans to sell Palmyra Medical Center in Albany, Georgia to the large nonprofit system in town.  The price tag is $195 million in cash for Palmyra's 248 beds.

PEU Cerberus Capital Management got 1,552 bed Caritas Christi Health System for $895 million in capital commitments.  Conceivably, the hospital system can generate much of their multi-year capital through operations.

How do the deals compare on a per bed basis?

Cerberus purchase = $576,000 per bed

HCA sale = $786,000 per bed

The $210,000 per bed difference is indicative of America's bifurcated health care system.  Struggling safety net hospitals go for a lick and a promise to remain open, while majority PEU owned beds command a 36% premium. 

After buying Caritas Christi, Cerberus' new hospital division acquired two more Massachusetts hospitals from Essent Healthcare, an affiliate of PEU Cressey & Co.  The sale price was not disclosed.

One CEO highiighted the "instant access to capital" benefits of a Cerberus affiliation.  I take it that CEO didn't have ready access to Cressey's $50 million equity commitment to Essent.

Essent-Cressey and KKR-HCA share a Frist family tie.  Tommy Frist, Jr. and ex-Senate Majority Leader Bill Frist are part of the first family of for-profit health care. Cressey had this to say about Dr. Bill's role:

Senator William H. Frist, MD is a Partner and Chairman of the Executive Board responsible for acquisitions, divestitures and oversight of portfolio companies.
That means Bill knew about the deal.  HCA Tommy's Palmyra sale is held up by a Georgia Appeals Court.  It's set for an expedited hearing on September 19.

It seems HCA's buyout of the remainder of Denver's HealthOne may get oversight.  It's paying $1.45 billion for the 40% it doesn't own of the 2,259 bed system.  HealthOne beds are priced at a premium, $1.6 million per bed.  Of course, HCA can't buy cheap without harming the value of the 60% it already owns.

PEU hospital deals are America's present and future.  Beware hell hounds gnashing their teeth at the safety net door.  Once the hell hound opens the gate, struggling hospitals can be tempted by Satan's charms.