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Sunday, 12 April 2015 22:00

‘Hands-off’ joint venture: Keeping local control swayed Metro to partner with Community Health Systems

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Metro Health Corp.’s decision to partner with Community Health Systems Inc. came down to wanting to maintain “some local control.”

The Franklin, Tenn.-based Community Health Systems (NYSE: CYH) was one of 17 potential suitors initially contacted on behalf of Metro Health about a possible joint venture or merger. Community Health Systems ultimately won what amounted to a bidding process with its “hands-off approach” to operating a joint venture with Metro.

Of the health systems contacted by a consultant, Ponder & Co., 13 expressed an interest and eight later submitted initial proposals, according to a valuation report that Metro Health submitted to the Michigan Attorney General’s office.

The valuation report on the financial aspects of the transaction, prepared by global financial advisory firm Stout Risius Ross Inc., provides insight into how the deal came together and how Metro Health executives and directors placed a premium on autonomy as they sought a suitor. Executives at Metro Health and Community Health Systems have not publicly discussed the deal since they announced it in January through written press releases.

“While the financial consideration being offered was important, maintaining (Metro Health’s) current culture and local control to serve the people of West Michigan was considered to be as important as financial considerations,” the report states.


Among the eight prospects forwarding proposals were six for-profit companies and two nonprofit health systems: the University of Michigan Health System in Ann Arbor and Livonia-based Trinity Health, the owner of Mercy Health Saint Mary’s in Grand Rapids and Mercy Health Muskegon.

Trinity Health and U-M Health System, both of which partner with Metro Health in the Pennant Health Alliance, initially planned a joint proposal to Metro Health but ended up submitting separate formal offers. Metro Health also partners with U-M Health System to operate a radiation oncology center at the Metro Health Village in Wyoming.

Also interested in Metro Heath were some of the largest operators of hospitals in America, Community Health Systems among them.

Metro Health opted in April 2013 to proceed with talking further with Community Health Systems; Trinity Health and U-M Health System; Brentwood, Tenn.-based Vanguard Health Systems; and Duke LifePoint Healthcare in Durham, N.C.

After Duke Lifepoint and Vanguard dropped out of the bidding, Metro Health directors chose Community Health Systems over Trinity Health and U-M Health System. They cited the financial offer and the “cultural fit and the ability to maintain some local control,” according to the report Metro Health submitted to the attorney general.

“The board views CHS as the more ‘hands-off’ partner as long as the company continues to perform, which allows management and the culture to remain and the company to operate more autonomously,” the document states.


Both U-M Health System and Trinity ended talks with Metro Health in the latter half of 2013 “due to the inability to agree on the structure and ownership” of a joint venture.

Trinity Health proposed acquiring a 60-percent share of a joint venture with Metro Health and wanted to appoint 60 percent of the board of directors and reserve the right to approve budgets, strategic plans, issuing debt, the acquisition or dissolution of significant assets or services, and major corporate changes. In exchange for the 60 percent share, Trinity also offered to pay $60 million to the Metro Foundation and a prorated share of a capital plan ranging from $100 million to $125 million.

U-M Health System proposed a joint venture where it held a 75-percent share and Metro Health held 25 percent. The Ann Arbor health system would have paid $25 million into the Metro Foundation after five years in exchange for a 100-percent stake. U-M Health System also committed to a $100 million, five-year capital plan.

U-M would have appointed three members of the board and held reserve powers over the collaborative appointment of the remaining eight.

In contrast, Community Health Systems proposed a 10-member board of directors with appointments split equally between itself and Metro Health.


The Michigan Attorney General’s office plans to host a public forum this month to hear opinions on the proposed joint venture. A part of the attorney general’s routine review of the transaction, the forum is scheduled for 5-7 p.m., April 23, at the hospital’s Metro Health Conference Center in Wyoming.

State law requires the attorney general to approve a for-profit corporation’s acquisition of a nonprofit organization to ensure the assets continue for a charitable use.

The two sides in the deal agreed to a valuation of $260 million for Metro Health, minus long-term debt and capital leases, plus $18.5 million in net working capital for an adjusted purchase price of $278.5 million, according to the valuation report submitted to the attorney general’s office. That would put Community Health Systems’ interest in the joint venture at $222.8 million, according to the report.

The final purchase price may change by the time the transaction closes or if the attorney general’s review reaches a different conclusion on the valuation of Metro Health than what was agreed to in the September 2013 sale agreement. The Attorney General’s office in February contracted with AlixPartners, a global consulting and business advisory firm, to assist it in reviewing the transaction and set a July 1 deadline to issue a report.

The attorney general’s findings could alter how much of the proceeds from the sale end up going to Metro Foundation. The valuation report submitted to the attorney general by Metro Health indicates that $45.1 million in net proceeds from the joint venture — $34.4 million from the sale after net debt and liabilities, plus $10.7 million in existing foundation assets — would go to the foundation.

Those figures are based on asset values at the time Community Health Systems and Metro Health signed their agreement in September 2013. The final values are subject to market fluctuations in asset values, the final sale price, and the attorney general’s findings.


The use of the proceeds is at the heart of a lawsuit filed by Laura Sacha-Staskiewicz, the former director of the Metro Foundation. She claims in the suit, filed March 30 in Kent County Circuit Court, that Metro Health CEO Mike Faas fired her in January when she voiced concerns that the health system intended to close the foundation and divert proceeds from the sale.

Metro Health declined to comment on the case.

Community Health Systems, the largest operator of hospitals in the U.S. with 206 facilities in 29 states, also committed to making $120 million to $125 million in capital investments at Metro Health over five years, including putting $20 million to physician recruitment and practice acquisitions.

Since Metro Health directors began the process that led to the selection of Community Health Systems, a key rationale for seeking a strategic partner was access to capital needed to compete in the market against the much-larger Spectrum Health and with Mercy Health. Metro Heath’s lender on the bond financing for its new $150 million hospital that opened in 2007, Bank of America, limits the health system’s use of capital funds, according to a Feb. 17 memo to the Michigan Attorney General’s office asking for approval of the deal with Community Health Systems.

“Metro Health is dedicated to providing quality care to its patients and recognizes the benefits of working with a strategic partner that can provide additional stability and resources to enable Metro Health to continue its mission in West Michigan,” the memo states.

Read 3755 times Last modified on Wednesday, 22 April 2015 15:46

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