Blue Wolf Leading Pack For Daughters
As the Daughters of Charity Health System tries to forge a path forward after a months-long saga to sell itself off to a for-profit operator fell through, a New York-based private equity firm appears to be its likeliest savior.
Multiple sources have told Payers & Providers that Blue Wolf Capital Partners LLC is the leading candidate to acquire the Los Altos-based Daughters of Charity. The hospital system, which operates six acute care facilities in and around Los Angeles and San Jose, would likely remain a not-for-profit entity if it accepted Blue Wolf’s offer, though few specific details of its proposal were available. If that’s the case, it would not require a regulatory review that eventually undid Daughters of Charity’s attempt to sell to Ontario-based Prime Healthcare Services.
If such a transaction is consummated, it would prove a come-from-behind victory of sorts for Blue Wolf. It had proposed last fall a takeover of select assets of Daughters of Charity through an affiliated company, New Found Health Holdings, LLC, for about $86 million and assume another $717 million in debt and other liabilities. Daughters of Charity’s medical office buildings would have been sold to another investor and leased back to the system and its medical foundation, but Blue Wolf would have held an option to acquire its hospitals at a later time. It would have invested another $300 million into its infrastructure even before the facilities had been acquired.
The Blue Wolf bid had been supported by the labor unions representing most of Daughters of Charity’s 8,500 employees, but had received lukewarm support from its bondholders. Daughters of Charity internal documents also indicated that Blue Wolf balked at putting down a non-refundable deposit, which may have turned the system off the deal initially.
Sources have said the current Blue Wolf proposal is similar in structure to its prior bid, but that it is offering more money to Daughters of Charity, and that it is stronger in other aspects.
Blue Wolf officials declined to comment. Daughters of Charity spokesperson Elizabeth Nickels said the system is continuing to speak with several potential buyers and that likely no announcements about a deal would be made until mid-summer.
Sources say that interest is high in Daughters because its assets are sound but mismanaged, and that a new owner could quickly cut costs and put it in the black. The system had been losing as much as $10 million a month last year before it began looking for buyers, and it recently engaged in a round of job-cutting to help stabilize its operating costs.
Aside from Blue Wolf, there are two other potentially strong bidders for Daughters of Charity.
One is Riverside-based Strategic Global Management (SGM), a for-profit that operates seven hospitals in Riverside, San Bernardino and Orange Counties. It is headed by Kali Chaudhuri, M.D., an orthopedic surgeon by training who is best known for operating the now-defunct KPC Medical Management medical group, which went bankrupt in 2000. SGM initially offered last year $510 million to purchase the system, roll it into a new not-for-profit organization and assume some $229 million in debt and other obligations. However, sources have suggested that SGM may be stretching its resources to close the deal, which would virtually double its size overnight and require it to manage facilities hundreds of miles away from its headquarters.
The other strong bidder is Prospect Medical Holdings, which operates 13 hospitals in California, Texas and Rhode Island. Its bid last year was $469 million plus the assumption of $229 million in liabilities. However, sources have suggested that Prospect’s parent company, Los Angeles-based venture capital firm Leonard Green & Partners, L.P., may have qualms about executing such a deal.
Prime Healthcare Services, the Ontario-based for-profit hospital operator, had initially prevailed with a bid valued at $831 million, including $394 million in cash and an assumption of $449 million in liabilities, including $328 million in pension and other employee-related obligations.
However, Prime’s plan also included converting the Daughters of Charity system to for-profit status. Although California Attorney General Kamala Harris approved the transaction earlier this year, her insistence that Prime maintain current levels of healthcare services for the next decade -- five years longer than Prime had wanted -- prompted the hospital chain to back out of the deal.
That may have cost Prime as much as $20 million from its $40 million deposit, although sources say the company may have only surrendered $5 million. Prime also committed $150 million in capital improvements, compared to the $300 million proposed by Blue Wolf.
If there is any sticking point to Blue Wolf completing a deal, sources say it is the insistence of Daughters’ management to continue to entertain offers from bidders that are considered peripheral at best.
One such example is JPH Consulting. It’s a Los Angeles-based operator of nursing homes that does not own any acute care hospitals. An affiliate of JPH made an offer last year to acquire Daughters’ St. Vincent Medical Center in Los Angeles for $40 million, which was ultimately rejected. Sources say JPH is continuing to bid to acquire some of the Daughters assets in Southern California, and that may prove to be a distraction in closing a single larger deal.
“The big issue is getting to the finish line,” said one source who asked not to be identified.
