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
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.
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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.
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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.”