Two independent financial experts that reviewed for-profit Prospect Medical Inc.’s recent purchase of nonprofit Eastern Connecticut Health Network assessed a fair market value for the deal “well below” the $105 million price the California company paid.
Yet, because of ECHN’s staggering debt and other liabilities Prospect agreed to assume, such as unfunded pensions and indemnity reserves, the new health network’s balance sheets likely will start the fiscal year at a loss, even though some of its unrestricted charitable accounts, like the lucrative Raymond F. “Sonny” Damato estate, can legally be used to pay off lenders, state officials and financial advisers say.
In order to comply with the state Conversion Act that affects nonprofits being sold to a for-profit entity, ECHN retained two independent firms to provide a valuation and fairness opinion on the transaction before state regulators granted their approval last summer.
According to the state attorney general’s final decision on the sale, which closed Oct. 1, Duff & Phelps, a New York valuation expert in complex corporate mergers, acquisitions, and restructuring, assigned a total estimated fair market value for ECHN assets, including its two hospitals, Manchester Memorial and Rockville General, as well as its other wholly owned and joint ventures, at $70.2 million.
Meanwhile, Chicago-based Navigant, hired to act as the financial expert on the transaction for the attorney general’s office, pegged the total fair market value of the same ECHN properties at $63.75 million.
The most current numbers show that “in short … nothing will remain after ECHN pays off its liabilities,” the attorney general’s final decision states. “In fact, it appears that ECHN will not even have sufficient assets to fund the indemnity reserve or to fully pay for its liabilities in excess of $77 million.”
The expected overage is currently tallied at $7.9 million.
“Given these numbers, we conclude that the sum that is equal to the fair market value of ECHN is currently zero,” the decision states.
While the price negotiated for the sale of ECHN’s assets equals or exceeds the price it would command in an open and competitive market, it would be “nonsensical” to approve the sale of a nonprofit that didn’t rectify outstanding debt, which is the primary goal, the decision states.
Such was the case when the sale of nonprofit Sharon Hospital was denied, the report continues.
Still, some proceeds from ongoing endowments and unrestricted charitable funds, such as the massive Damato estate which has yet to be sold or liquidated, could be used to pay off some of those liabilities.
For now, the net appreciation of unrestricted endowments that will be transferred for that purpose is approximately $5.9 million. A more formal accounting is to be filed quarterly with the attorney general’s office, detailing the management of the charitable funds, some of which are to be held by an outside, independent entity known as ECHN Legacy and used only for their directed purpose.
According to the attorney general’s final decision on the hospital sale, Prospect agreed to pay $105 million to a “Net Working Capital reconciliation” account, minus certain ECHN liabilities — unfunded pension obligations, captive insurer liability, capital leases, workers compensation liability, asbestos abatement liability, and any interest in an ECHN joint venture should the partnership not be transferred to Prospect.
Proceeds first must be used to settle all outstanding bonds and other indebtedness not otherwise assumed by the for-profit corporation, the decision says.
The remaining proceeds will be used to fund a $4.5 million indemnity reserve for the next three years for payment of ECHN liabilities that may arise after the closing.
Anything left over will be held in the residual ECHN corporation to be used for post-closure costs, liabilities, and wind down of operations.
As a nonprofit, ECHN had a number of charitable endowments and trusts, some with restrictions on how the money could be used, such as beds for the poor or cancer patient treatments, that can never be used to benefit a for-profit entity.
Others, however, have no restrictions, and can be used to pay down the massive debt ECHN has incurred in the last decade or so.
As of March 30, those charitable gifts held a value of $23,116,006, state records show.
ECHN also had a number of wholly owned entities, some of them for profit, including visiting nurse and elder care services.
ECHN also held ownership interests in some community-based services, including some physician groups, Aetna and Manchester ambulance companies, Evergreen Endoscopy Center, and the Tolland Imaging Center, and those are expected to transfer to Prospect.
Prospect, which is incorporated in Delaware and has its principal base of health care facilities in the Los Angeles area, negotiated a purchase that included substantially all of ECHN’s assets, including the properties, assets, and businesses of, or ownership interests of ECHN affiliates.
Prospect also bought ECHN’s ownership interests in the joint ventures, and pledged to spend an additional $75 million on capital projects at ECHN facilities in the next five years. The purchase agreement also requires Prospect keep all current staff employed at the same rate of pay and benefits, and all existing facilities open for the next three years.
Prospect, which besides the ECHN properties now owns 18 facilities in California, Texas, Philadelphia, New Jersey, and Rhode Island, will incur no debt with this purchase, Navigant reported in its review of the transaction, and would use “operating cash” to finance the Connecticut deal.
Prospect also has bought the Greater Waterbury Health Network, and its Waterbury Hospital, for an additional $100 million, with $55 million promised for capital projects there.
According to the attorney general’s office, Prospect must submit fully executed copies of the Asset Purchase Agreement, without schedules, within 30 days of closure.
As soon as reasonably possible, it also must provide a final closing statement of the transaction that sets forth the balance sheets of ECHN immediately prior to and after the closing with a net proceeds analysis. That document has not yet been made available, state officials say.
