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Reprinted from the July 10, 1995 issue of
MODERN HEALTHCARE
Copyright, Crain Communications Inc., 740 Rush, Chicago, IL 60611 All rights
reserved |
by Sandy Lutz
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| Control becomes issue in
50-50 deal |
Control, or lack of it, is a chief concern in most hospital
mergers, and it apparently has caught the attention of the Securities and
Exchange Commission as well.
Late last month, the SEC required Champion Healthcare Corp. to restate its
earnings for 1994 and the first quarter of 1995, saying Champion didn’t have
control of a joint venture between the company and a not-for-profit hospital
in Fargo, N.D.
Houston-based Champion completed the 50-50 venture last December. Its
one-half contribution was $20 million and Heartland Medical Center is Fargo.
The other half of the partnership was Dakota Hospital, a non-for-profit
facility in Fargo. The deal was described as one of the first truly equal
ventures between an investor-owned chain and a non-for-profit facility (Jan.
9, p. 8).
Even though Champion didn’t hold a majority position in the joint venture,
now called Dakota Heartland Health System, the company believed it had
enough control to consolidate the system’s assets and revenues on its
balance sheet.
Last month, the SEC said no.
Champion, a nine-hospital chain, believed the deal “more than fulfilled the
requirements of consolidation,” said Charles Miller, Champion’s chairman,
president and chief executive officer. Champion contended it had control
because it held the management contract, as well as half the equity in the
venture. However, “there is neither sufficient precedent nor accounting
literature to make this a clear-cut issue,” Miller added.
Champion isn’t the only company doing such deals. Giant Columbia/HCA
Healthcare Corp. has closed at least three 50-50 joint ventures and is
negotiating others.
Columbia spokeswoman Lindy Richardson said the SEC ruling hasn’t had an
impact on Columbia and declined to speculate as to how it might affect the
chain in the future. Champion treasurer Deborah Frankovich said the SEC
scrutinized its deal with Dakota closer than it has Columbia’s deals because
of Champion’s size. The Fargo deal had a bigger impact on Champion’s
multimillion-dollar revenues and assets than similar deals have had on
Columbia’s multibillion-dollar financials.
Frankovich said the SEC decision won’t change the way Champion conducts
future deals. “It wouldn’t be wise to let the accounting treatment drive the
business deal,” she said.
However, observers contend that accounting treatments are important drivers
in hospital merger deals.
“The for-profits want to consolidate; it’s very important to them,” said
Joshua Nemzoff, who represented Dakota in the negotiations and is now
president of Nemzoff & Co., a Nashville, Tenn.-based
mergers-and-acquisitions firm.
By consolidating a hospital’s revenues and assets in its financial
statements, hospital chains can appear to be larger and growing faster than
they really are. That’s especially important to Wall Street, which weighs a
company’s merits based on its growth rate.
Under accounting rules, a chain can include a hospital in its balance sheet
as long as it controls more than 50% of it. But in Champion’s case, it was
counting the Fargo system’s revenues and assets even though it owned only
50%.
Champion had first-quarter assets of $244 million. When it was forced to
subtract the Fargo joint venture, those assets dropped 13% to $212.8
million.
The drop is even bigger in the revenues category. Without the Fargo joint
venture, Champion’s revenues for the first quarter ended March 31 dropped
48% to $28.7 million.
The restatement doesn’t affect profits because companies must subtract the
profits received by other equity holders. What’s reported as “minority
interests” are profits subtracted from the bottom line.
Profits also are paramount for investors. Because they’re not affected,
Miller said he decided not to go through “prolonged debate” over who was in
control in Fargo.
Now, because Champion doesn’t “control” the Fargo joint venture, it must
account for the hospital as an investment, rather than an owned operation,
meaning the venture can’t be included in Champion’s revenues or asset
totals.
How, and if, this SEC decision will affect Columbia is not clear. Columbia
has 50-50 deals with tax-exempt hospitals in Alexandria, La; Miami; and San
Antonio. It also has has such deals pending in Cleveland and Denver.
However, Nemzoff believes the SEC decision won’t affect Columbia because
control isn’t as issue in the chain’s 50-50 deals; Columbia is almost always
the controlling partner, he said.
Another acquisitive chain, Tenet Healthcare Corp., doesn’t have any 50-50
ventures with not-for-profits, Christi Sulzbach, senior vice president of
the investor-owned chain, said that if a hospital wanted to do a 50-50 deal
with Tenet, the company would have to analyze “whether the transaction’s
structure makes sense.”
Some not-for-profits are leaning toward 50-50 deals because they don’t want
to lose control, Nemzoff said. “Giving up control is the single biggest
reason that not-for-profits don’t sell,” he said. “However, if they think by
doing a 50-50 venture they haven’t given up control, then they don’t
understand their own deals.”
For example, in the Fargo deal, Champion had only three of the system’s 12
board seats. However, that lack of board control was offset by Champion
having a management contract that can’t be terminated, Nemzoff said.
That’s different from some 50-50 hospital joint ventures in which the
for-profit and not-for-profit partners hold an equal number of board seats,
but the for-profit company controls the management contract.
Nemzoff added: “My idea of control is I get to tell you what to do when
there’s nothing you can do about it.”
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