Daughters Of Charity Tries Once Again

The Daughters of Charity Healthcare System may have found another deep-pocketed suitor, one willing to pump millions of dollars into the struggling hospital system.

The Los Altos Hills-based Daughters of Charity announced late last week it had come to terms with a New York-based firm that would recapitalize its hospitals.

That firm, BlueMountain Capital Management, has agreed to invest $250 million Daughters of Charity. It would manage Daughter of Charity’s six hospitals and its medical foundation through another management arm, Integrity Healthcare. BlueMountain would also hold an option to purchase the entire system outright after three years.

Integrity Healthcare’s leadership includes Mitchell R. Creem, who has made a reputation turning around hospitals in Southern California, including the UCLA Healthcare system a decade about and USC University Hospital and USC Norris Cancer about a half-dozen years ago.

The agreement with BlueMountain came as a bit of surprise, as sources had suggested that Blue Wolf Capital Partners LLC, another New York investment firm, had been the leading candidate to acquire Daughters of Charity. But the BlueMountain offer included far less capital and would have likely included job cuts and the sales of assets.

“In evaluating candidates to manage the hospitals, our priority was to seek the strongest bidder who could provide the greatest long-term financial stability while honoring the obligations to our associates, physicians, retirees and other constituents,” said Daughters of Charity Chief Executive Officer Robert Issai. “The transaction represents an extremely attractive opportunity for DCHS, allowing it to continue its operations and mission as a non-profit system with the support and backing of strong and well-qualified partner organizations.”

Daughters of Charity operates four hospitals in the San Jose area and two others in Los Angeles County. It has been under severe financial duress, losing more than $10 million a month, according to Issai, and pondering bankruptcy as a potential option.

BlueMountain has more than $21 billion under management. It invests not only in healthcare businesses, but in distressed companies as well, focusing on turning them around.

“BlueMountain is honored to have been selected by the DCHS board,” the company said in a statement. “We are excited to provide substantial expertise and financial capital to DCHS, positioning the hospitals to meet the evolving healthcare needs of the region. We look forward to working with the DCHS family of physicians, employees and all stakeholders to strengthen the hospitals for the betterment of these communities.”

The transaction requires regulatory approval, including that of Attorney General Kamala Harris. She had approved a prior takeover of Daughters of Charity by a for-profit operator. However, Ontario-based Prime Healthcare Services backed out of the proposed $843 deal after it said the conditions imposed on it by Harris’ office were too onerous for it to proceed.

In that instance, Prime said it would assume the liabilities for the pensions of some 7,600 Daughters of Charity employees. Under this proposed deal, Daughters of Charity would still be liable for them, although they would be converted from a so-called “church plan to one that would be governed by the Employee Retirement Income Security Act, or ERISA.

A statement issued by Dave Regan, president of the Service Employees International Union-United Healthcare Workers West, which represents slightly more than a third of Daughters of Charity employees said in a statement last week that “we are anxious to see the details of the BlueMountain proposal so we can understand what commitments they make to ensure the community receives the best possible healthcare."

However, the union itself appears to favor the deal over prior proposals. 

“Our early analysis indicates that BlueMountain is a much better fit with Daughters than the previous bidder, Prime Healthcare,” the SEIU-UHW said in a post on its website, adding that it would meet with BlueMountain officials “as quickly as possible to make sure members jobs and benefits are fully protected.”