|Reprinted from the January 5,
1995 issue of MODERN HEALTHCARE
Copyright, Crain Communications Inc., 740 Rush, Chicago, IL 60611 All rights
By Sandy Lutz
|Dakota Hospital (above) joined Heartland
Medical Center (right).
Two Fargo, N.D.,
hospitals resolved their ownership differences and merged last month in a
deal that gives unusual protection to a not-for-profit hospital partnering
with a for-profit chain.
Joining are Heartland Medical Center, owned by for-profit Champion
Healthcare Corp. of Houston, and not-for-profit Dakota Hospital.
Their new for-profit Dakota Heartland Health System controls 284 of the 662
private staffed beds in Fargo. The city’s other private hospital is 378-bed
“Everybody’s talking about 50-50 joint ventures, but this is the first one
we’ve really seen” between a for-profit and a not-for-profit, said Joshua
Nemzoff, principal in charge of mergers and acquisitions in the Nashville,
Tenn., office of Ponder & Co.
Nemzoff, who advised Dakota in the negotiations, said most for-profit chains
that partner with not-for-profit hospitals retain control, either through
equity or contracts in which the for-profit company’s management can’t be
fired by the board. Frequently, the deals are structured as partnerships in
which the for-profit chains are general partners.
But the Fargo deal contains safeguards designed to preserve the community
assets of Dakota.
Because Dakota was the larger hospital, Champion contributed $20 million to
match Dakota’s asset investment.
Also, Dakota appoints six members to the system’s 12-member board. Champion
appoints three, and the nine appointees fill the three remaining seats.
That differs from others deals in which the not-for-profit and the
for-profit appoint an equal number of board members. Typically, for-profit
appointees vote as a block.
Champion has a contract to manage the system, but its fee is just $1 a year,
and the board can fire the chief executive officer or the chief financial
“We feel pretty good about it,” Harry Hawken, Dakota’s chairman, said about
the hospital’s share of control.
Dakota also has a “one-way put” option. In 18 months, it can require
Champion to buy its half of the facility. The price would be based on a
total system value of 5.5 times earnings before depreciation, interest and
taxes. That calculation, called EBDIT, is frequently used to value
Champion, however, cannot require Dakota to buy it out under those terms,