Fun Facts about The Carlyle Group's Purchase of Manor Care

While the media and government regulators ignore Carlyle's history of abandoning long term acute care patients in times of disaster, other fun facts are coming to light. But before illuminating other interesting tidbits, I'll drive home the first point:

1) The Carlyle Group's LifeCare Hospitals had the largest number of patient deaths post-Katrina and George W. Bush didn't find this noteworthy enough to put in his Lessons Learned report. Regulators and elected officials mostly ignore this failure to acutely ill patients in a time of crisis. None have challenged LifeCare's defense which blames the federal government for up to 24 wrongful deaths occurring on their watch. One Florida official finally raised the question in his opinion piece in the St. Petersburg Times just yesterday.

2) Gail Wilensky, the ex-Medicare/Medicaid chief under George H.W. Bush, will pocket $790,000 in options and stock appreciation rights from the sale of Manor Care. Her 27,205 shares of owned stock at $67 per share bring her total take to $2.6 million. Her capital gains tax savings due to Bush Jr.'s tax cut could amount to $130,000. Note that over two thirds of Manor Care's 2006 revenue came from Medicare and Medicaid, Gail's prior responsibility. (Ms. Wilensky is also a director of Cephalon, Inc.; Gentiva Health Services, Inc.; Quest Diagnostics Incorporated; SRA International; and United HealthCare Corporation.)

3) Manor Care CEO Paul Ormond will gross $83.8 million in option and other stock compensation from the sale of his company. His direct stock holdings add another $245 million, bringing his total take to roughly $330 million. His Bush tax savings amount to over $16.5 million.

4) The nursing home company had a $167 million profit last year and paid Uncle Sam $97 million in income taxes. Interest expense amounted to $31.5 million.

5) Debt to finance the purchase includes $4.6 billion through a CMBS facility. Manor Care's debt rating dropped to "B" status. This translates to a higher interest rate, especially in this credit conscious environment.* The prospectus states a maximum 6%. Interest expense on $4.6 billion at 6% is $276 million. This alone wipes out Manor Care's annual profit and potentially eliminates its federal tax obligation.

6) Carlyle will invest $1.3 billion of their funds in equity financing. This is only obligated through the closing date and can be turned into debt afterwards, should the firm desire.

7) The private equity firm will also take out a $900 million in senior secured credit facilities. The prospectus states it will be at the same interest rate as the CMBS debt. This adds another $54 million in debt to the firm's income statement, bringing the total new interest expense to $330 million.

8) Using its 2006 income statement and the new $330 million in interest expense, Manor Care would need to cut expenses some $30 million company wide to break even. They would pay nothing in income taxes to the federal government despite getting two thirds of their revenue from that same source via Medicare and Medicaid.

9) The Carlyle Group plans to split the company in at least two parts and as many as 1,100 as it segregates operations from real estate in its 550 facilities. This is done to segregate assets for legal liability, like the wrongful death lawsuits LifeCare faces after Hurricane Katrina!

What goes around, comes around and this PEU has the distinct odor of fetid financial flood waters. Rising tides don't lift all beds, something Carlyle should know acutely.


*(From Investment Dealer's Digest: As a result of the widening in yield premiums, borrowers face higher costs. "What happens is the rate we charge borrowers is directly related to where we can clear bonds," says Pendergast. "Investment grade spreads are wider and the yield on the B piece required by buyers is much higher." While the B piece is a small part of a CMBS deal, finding a buyer for it is key to a transaction. The yield demanded by the buyer of the B piece will determine the cost effectiveness of the whole securitization process. "Overall, lenders are charging more to clear the new spreads charged by investors," says Michael Higgins, head of real estate finance at CIBC World Markets.)

Is the Carlyle Group Pulling an Exxon on LifeCare?

The Supreme Court agreed to hear Exxon's appeal regarding punitive damages. The company claims no responsibility for actions of a drunk sea captain, even though they hired him, were aware of his alcohol treatment and his later falling off the wagon. Exxon also provided a ship with broken radar, a violation of at least the spirit of their agreement with Native Americans who sold them the land for the oil terminal for $1.

The Exxon case prompted me to find parallels to The Carlyle Group's defense of wrongful patient deaths in their LifeCare Hospital in New Orleans post Hurricane Katrina. Carlyle blamed rogue providers, doctors and nurses that euthanized patients in the horrific aftermath. When none of the clinicians got convicted on criminal charges that defense weakened considerably.

LifeCare changed directions under the radar of most news outlets. They claim their patients became wards of the federal government when FEMA set up evacuation teams in the New Orleans area. Therefore, the federal government was responsible for their care even though those teams might be miles away from their flooded facility in Memorial Hospital.

Just as the Exxon story is deeper than a captain on a bender, so is LifeCare's. As a hospital within a hospital, LifeCare had separate clinical staff, its own credentialed doctors, and administrative leadership. The supposed Joseph Hazelwood of New Orleans is Dr. Ana Pou, an ENT doctor specializing in cancer treatment. While her skills are advanced, they don't match up with patients in a long term acute care environment. If she had privileges at all, they were likely consulting.

If Dr. Pou served as the primary caregiver for LifeCare patients, she was filling in. The question is for whom? What LifeCare physicians had hurricane duty and bolted? Which contracted providers abandoned their patients in the time of need? If any did so, they share responsibility with Carlyle for what eventually happened to their patients.

If LifeCare docs hung around for hurricane duty, then Carlyle has a different problem. Their administrator gave a Memorial doctor and non-LifeCare nurses access to their patients. The company already sued Tenet Healthcare as a result of the aftermath. The two for-profit firms settled the case, dividing up liability in a now sealed, thus secret agreement.

All this speaks to the ethics of The Carlyle Group and their affiliate as the huge private equity firms closes in on its purchase of Manor Care with 550 nursing homes. LifeCare had a duty to their patients in a time of disaster and from my experience failed. I endured in a 725 river flooded teaching hospital in Virginia and evacuated a 165 bed facility on the Texas Gulf Coast before then record Hurricane Gilbert. Fortunately Gilbert never made the predicted turn, but I know the challenges getting patients transferred with several days notice of a potential landfall. Much worse is trying to provide services in a powerless hospital with six dark intensive care units. In no time the best hospital becomes unsafe for all. Toilets are unflushable, supplies dwindle and staffs tire while patients suffer. Hope returns when they can be transferred.

After sharing my concerns with the only reporter to note LifeCare's relationship to The Carlyle Group, I received this:

The 24 deaths that occurred there, while tragic, were the decisions of the people that were put in charge by LifeCare's previous owners, GTCR Golder Rauner. Also, I think most people feel that the circumstances surrounding the Katrina tragedy were chaotic, unique, and atypical of how private equity firms will run care facilities on a regular basis.

It's much easier to run facilities on a regular basis. A firm's mettle is tested in times of difficulty, of disasters. The Carlyle Group's failure during Katrina might be blamed on the previous owner, GTCR Golder Rauner, as suggested by the Toledo Blade reporter. However, Carlyle's had full reign to manage the aftermath and that reeks greatly. This deserves the attention of the news media and Congressional hearings. A look at the huge, politically connected private equity underwriter's mission statement is most telling:

The Carlyle Group: Our mission is to be the premier global private equity firm, leveraging the insight of Carlyle's team of investment professionals to generate extraordinary returns across a range of investment choices, while maintaining our good name and the good name of our investors.

Apparently a good name is more important to this PEU than owning up to their mistakes, to treating patients and their families fairly. The Exxon story couldn't have resurfaced at a better time...

Humana & SEIU Point to Death of Employer Sponsored Health Insurance

Huge health insurance provider, Humana just released their third quarter results. Compared to 2006, the current year has seen a decline in the number of people covered in the commercial group segment. The number with employer sponsored coverage declined 4.2%.

What happens if the country's experience reflects Humana's? How many more will drop from group health insurance into no coverage, individual plans, or the dreaded government sponsored programs? The answer is nearly 7.5 million Americans. Should 4.2% of the 177 million with employer sponsored insurance fall from the rolls, the question remains as to how many would purchase coverage or qualify for Medicaid or SCHIP.

Someone is waiting in the wings, salivating to deduct paychecks to pay for employee paid health coverage, unions. SEIU President Andy Stern said "employer health insurance is dead and not coming back." I thought it was sneaking out the door under the cover of Congress, the White House and America's Unions. Humana's results drive the point home

Exxon Key Test for Corporatism's Insidious Reach

The U.S. Supreme Court agreed to hear Exxon's appeal of the already reduced $2.5 billion punitive damage award against the company for the Valdez oil spill in Alaska. A federal appeals court already cut in half the 1994 $5 billion award. Exxon wants to pay as little as possible to the 33,000 victims still living. They may just get their wish according to the AP:

The justices said they would consider whether the company should have to pay any punitive damages at all. If the court decides some money is due, Exxon is arguing that $2.5 billion is excessive under laws governing shipping and prior high court decisions limiting punitive damages.

The company argued it should not be held responsible for the mistakes of the ship's captain, Captain Joseph Hazelwood, who violated clear company rules when the Exxon Valdez ran aground with 53 million gallons of crude oil in its hold on March 23, 1989.

How could Exxon be held responsible for the glitch of one of their employees? Didn't Blackwater CEO Eric Prince just tell Congress that "people do stupid things". Well, it turns out Exxon knew their captain had gone through alcohol rehab and kept him on the payroll.

The plaintiffs argue Exxon knew Hazelwood had sought treatment for drinking, but had begun drinking again. "Exxon placed a relapsed alcoholic, who it knew was drinking aboard its ships, in command of an enormous vessel carrying toxic cargo across treacherous and resource-rich waters."

While it may not have been illegal, Exxon broke its commitment to the Native Americans who sold the land for the oil terminal at Valdez to the oil giant for $1. One of their demands was the use of "state of the art" radar. According to Greg Palast "the tanker’s radar was left broken and disabled for more than a year before the disaster, and Exxon management knew it. It was just too expensive to fix and operate."

The court's last ruling on punitive damages, in February, set aside a nearly $80 million judgment against Altria Group Inc.'s Philip Morris USA. The money was awarded to the widow of a smoker in Oregon.

If anyone is counting on this Supreme Court to land on the side of the victims of corporate malfeasance, don't hold your breath. The case likely won't be heard until spring of 2008. How many billions more will Exxon have earned by then? Their bottom line totalled $90 billion the last three years, $150 billion since 2000. Cash flow from operations from 2004-2006 exceeded $155 billion, of which $54 billion was used to repurchase company stock.

Pay close attention to this case, common citizen. It will speak volumes about the power of the players in a "free market, democracy". It's not a good sign that Supreme Court Justice Sameul Alito owns between $100,000 and $250,000 in Exxon stock. While he recused himself, my guess is the 33,000 little guys and gals don't fare so well against the Exxon's and Philip Morris' of the world. But time will tell...

Carlyle Enters DynCorp's Niche with ARINC

The Carlyle Group recently closed on its purchase of ARINC. The debt it shouldered to finance the deal caused the company's debt to drop from 'BB' to a more speculative 'B' rating from Standard & Poors. That usually means the issuer must pay higher interest rates to move the offering. Those higher interest costs are then passed on to ARINC's customers, in this case the federal government.

While researching the company, I found a press release indicating ARINC was just awarded an indefinite delivery, indefinite quantity contract for the Department of Defense's Anti-Drug/Terrorism Program. Just hours before I read about DynCorp's doing similar work for the State Department. It turns out ARINC worked for that same State Department on drug interdiction from Central and South American since 2002. The release stated:

ARINC and four other prime contractors will compete for task orders on a wide range of deliverables such as anti-drug technologies and equipment, special-purpose vehicles and aircraft, advanced communications, security training, crew training, geographic information systems, and in-field support. About 80% of the work will be located outside the U.S. in theaters from Afghanistan to Colombia. Contractors will be expected to simultaneously provide services, critical equipment, and material.

Carlyle enters another profitable niche through another indefinite delivery, indefinite quantity government contract. However with ARINC's increased debt service the acquired company likely won't pay Uncle Sam any taxes on profits for a few years. Carlyle likes to milk the government but pay taxes in return? Not if Carlyle's Charles Rossotti can work his magic. He wants the firm to pay a mere 8% on any profits, roughly half of his investment managers tax on carried interest. Why does a $75 billion firm need a break when the average citizen pays 35% on similar income?

Update 8-15-13:  Carlyle finally sold ARINC for $1.39 billion to Rockwell-Collins, after selling a chunk of ARINC to Carlyle affiliate Booz-Allen-Hamilton for $154 million.   That's over $1.5 billion on a deal done in the days of highly leveraged PEU deals.  Add management fees and special dividends and Carlyle made what multiple on ARINC?

Army Looks for Contract Fraud in Abu Ghraib Fashion

The Army plans to focus on a Kuwaiti purchasing office rife with corruption. According to the AP:

A team of specially trained investigators will hunker down in an Army office north of Detroit on Monday to begin poring over hundreds of Iraq war contracts in search for rigged awards. This team of 10 auditors, criminal investigators and acquisition experts are starting with a sampling of the roughly 6,000 contracts worth $2.8 billion issued by an Army office in Kuwait that service officials have identified as a hub of corruption.

Based on what the team finds, the probe may expand and the number of Army military and civilian employees accused of accepting bribes and kickbacks could grow, U.S. officials told The Associated Press. Nearly two dozen have been charged so far.

Of course the little people should pay for their role, but someone greater created the system. Do you recall Abu Ghraib and the torture of prisoners there? Only the junior people paid the price. Might this be the ceremonial offering of little folks for all that Iraqi corruption? Paul Bremer's team scattered $8 billion in unaccounted for cash before waltzing out of the country. How does prosecuting 23 people for taking over $15 million in bribes compare to the greater corruption? The Army wants us to believe it took a few crafty insiders to swindle the government.

Deceiving the checks and balances in the federal procurement system takes careful planning, Frank Anderson, president of the Defense Acquisition University at Fort Belvoir, said in a separate interview.

"You had some smart bad apples," said Anderson, who leads the organization that trains the military's acquisition officials. "It had to be someone who understood the business well enough to figure out how to get around the system."

A quick look at one contractor's SEC filings reveals some interesting elements of the Pentagon purchasing system. DynCorp reported on its contracts with the federal government over the last 3 years. Over 56% were indefinite delivery, indefinite quantity contracts. Those get turned into one of three types of arrangements, fixed price, time and materials, and cost reimbursement. DynCorp has $3.3 billion worth of contracts as of March 2007 with the State Department alone. Most of that is for the Civilian Police Program while the remainder covers International Narcotics and Law Enforcement. A government auditor recently revealed there is little documentation of what the State Department got for its $1.2 billion from DynCorp, the company charged with training Iraqi police.

What of the companies paying the enterprising Army soldiers bribes and kickbacks? Will they be identified, charged with crimes and executives held accountable? The government's track record with domestic businesses in this regard is poor. Numerous stock option cheats walk free despite ripping off shareholders for millions. Chiquita Banana execs funded South American terrorists and walked away with a fine. And British Petroleum committed numerous criminal offenses while led by Lord John Browne. His penalty was a cush job with a Carlyle Group energy joint venture.

Something bigger has been going on than a dozen or two rip off artists in a Kuwaiti army purchasing office. I have a sense blame will be delegated to the little guys while the system allowing corruption goes on unabated. One only need look at political donations and voting patterns. We have the best democracy money can buy...

The Pound Stops Well Below BP's Lord Browne (now with Carlyle)

BBC News reported on a $373 million fine levied by the U.S. Justice Department on British Petroleum for committing criminal acts, including fraud. BP was fined $50 million for the Texas City Refinery explosion in 2005 that killed 15 workers and injured 170 more. The firm also will pay $303 million for a natural gas price manipulation scheme that ran from April 2003 to February 2004. Four lower level employees have been indicted.

So what happened to Lord John Browne, the CEO who oversaw the company's operations while these criminal acts occurred? The BBC piece only mentions his resigning after a personal scandal. It failed to say he's now a top dog in The Carlyle Group's Riverstone Holdings, an energy joint venture. That was after Carlyle's James Baker let him off the hook in an outside study of the Texas City explosion. The PEU boys do look after one another...