By Beth Kutscher | December 3, 2015
California Attorney General Kamala Harris granted conditional approval Thursday to allow a private-equity firm to take over the Daughters of Charity Health System, but she once again imposed hefty requirements on the transaction.
The Los Altos Hills-based system needs a buyer to remain solvent and has already seen one deal fall through. But Harris is sticking to her original conditions. The latest approval terms require BlueMountain Capital Management to maintain the system’s essential services for at least 10 years. That condition was one of the deal breakers for Prime Healthcare Services, the first for-profit suitor that tried to buy Daughters.
“As expected, the attorney general’s approval is contingent upon BlueMountain’s acceptance of several complex conditions,” a spokesman for Daughters said in an e-mail. “BlueMountain is now in the process of reviewing these conditions and will make a decision as soon as possible. We will stay in close contact with them. We continue to believe this transaction will close in the very near future.”
BlueMountain is offering $100 million in exchange for the lease of Daughters’ information technology assets and the option to buy the system within three to 15 years. In addition, Daughters will receive a line of credit between $150 million and $160 million, which will be used in part to pay down its debt.
The New York-based private-equity firm plans to create a new entity, Integrity Healthcare, that will manage Daughters’ six hospitals. The attorney general’s conditions also stipulate that BlueMountain must provide $180 million for capital expenditures.
Under the proposed management agreement, Daughters will operate as Verity Health System of California. It will remain a not-for-profit entity, but will no longer have a religious affiliation. The attorney general’s terms also require BlueMountain to preserve the jobs and wages of the system’s 7,000 employees.
In a news release, Harris called the deal the “largest and most complex nonprofit hospital transaction in California history.”
The requirement to preserve Daughters’ essential services for 10 years is longer than BlueMountain had originally proposed. But advocacy groups urged the private-equity firm to accept the deal and its conditions.
“Consumer and health advocates had sought to keep the hospitals and services open longer than BlueMountain’s initial commitment of five years because of the important role these hospitals play in the community,” said Tam Ma, policy counsel for Health Access California, a consumer advocacy group. “We think it’s appropriate for the Attorney General to impose similar conditions on this deal as she did with the previous proposal to sell to Prime Healthcare. We hope BlueMountain accepts the conditions as a sign of good faith that they will be responsible and committed partners with these communities in operating these hospitals.”
The Service Employees International Union-United Healthcare Workers West, which criticized the Prime takeover, also urged BlueMountain to accept the deal in its current terms.
Daughters’ most recent earnings report showed continued deterioration of its finances. The system said that if the transaction doesn’t close, its board will consider seeking alternative deals, closing facilities and filing for bankruptcy.