KPC Healthcare Inc. was the stalking horse that won the race.
The Santa Ana-based healthcare systems operator made an initial “stalking horse” bid of $610 million for four hospitals and a nursing facility owned by an affiliate of Redwood City-based Verity Health System, a non-profit healthcare organization that filed for bankruptcy protection last August.
The biggest prize in the Verity portfolio is Lynwood’s St. Francis Medical Center, a 384-bed trauma center that KPC valued at $420 million.
When no other bids exceeded the $610 million initial bidding price, no auction was required and Verity Health System’s Board of Directors approved the sale on April 15, followed two days later by a bankruptcy judge in Los Angeles.
The bid still needs to be submitted to the state attorney general for final approval.
Last week’s events marked “an important milestone for KPC Health’s bid to acquire four Verity Health hospitals,” said Kali Chaudhuri, founder and chairman of KPC Group, which is the parent company of KPC Health.
“We look forward to working with Verity Health on a successful acquisition and welcoming these important community hospitals into our integrated healthcare system.”
KPC’s involvement as a potential bidder in the Verity properties wasn’t disclosed until last week; it had filed its bid under the name Strategic Global Management Inc., according to court documents.
The pending acquisition is the latest growth move by KPC Healthcare, which has a history of turning around underperforming assets.
KPC Health’s Orange County portfolio includes four hospitals—in Santa Ana, Orange and Anaheim—that generated $382 million in the 12 months ended Sept. 30, according to Business Journal data.
Its parent KPC Group also invests in real estate, pharmaceuticals and engineering. It says its global assets’ total value now runs about $10 billion, with $2 billion of that tied to KPC Health.
KPC Health is aiming to grow from a chain of seven hospitals in Southern California to 18 across seven states. The company also owns and operates independent physician associations, medical groups and various multi-specialty medical facilities.
KPC Health in March bought seven long-term acute care hospitals and two skilled nursing facilities located in Kansas, Utah, Mississippi, Arizona, Louisiana, and Texas.
It’s planning to double its workforce to 10,000 companywide.
A growth push was alluded to by KPC Health Chief Executive Peter Baronoff in an interview with the Business Journal last August, around the time of the Verity bankruptcy announcement.
He said at that time that that the company was “looking at acquisitions.”
Prior to joining KPC in 2018, Baronoff led Boca Raton, Fla.-based acute-care specialty hospital system Promise Healthcare during a period marked by several large acquisitions.
The deal for Verity’s hospitals, which have a combined 1,107 beds, includes Lynwood’s St. Francis Medical Center, valued at $420 million, as well as downtown Los Angeles’ St. Vincent Medical Center and St. Vincent Dialysis Center, which was valued at $120 million. The remaining $70 million was appropriated to Daly City’s Seton Medical Center, which also operates Seton Medical Center Coastside in Moss Beach, a 116-bed skilled nursing facility.
“KPC remains very optimistic about the future of these hospitals, their employees, and the value they bring to delivering quality health care to many California communities,” Baronoff said in a statement.
As part of the agreement, KPC agreed to keep main service lines open and make employment offers to substantially all employees at these facilities, including “full-time, part-time and contract [workers],” a company spokesperson told the Business Journal.
KPC’s pledge was important to its winning the stalking horse bid. Verity Chief Executive Rich Adcock had said in an earlier statement that the right buyer will “provide uninterrupted service and operations for all employees, physicians and patients.”
Prime Healthcare Services, an earlier bidder, pulled out of the deal because of the “onerous conditions,” the company said.
The City of Lynwood, located about 15 miles west of Orange County, also was reportedly interested in buying its local hospital, but did not close on a deal for St. Francis.
That hospital is located between South Gate and Compton, near the 105 Freeway.
Rising Labor Costs
The onerous conditions cited by Prime Healthcare may well include labor problems, which were cited in bankruptcy filings as a big reason for its financial problems.
The hospitals were previously owned by the Daughters of Charity Healthcare System, which had continuous losses due to “mounting labor costs, low reimbursement rates and the ever-changing healthcare landscape,” according to the bankruptcy filing.
It was sold in 2015 to private investor BlueMountain Capital Management LLC, which changed the hospital system’s name to Verity.
In 2017, Nantworks, a company controlled by billionaire Dr. Patrick Soon-Shiong, owner of the Los Angeles Times, acquired a controlling stake in Integrity Healthcare, the company that manages Verity.
Soon-Shiong’s goal was to revitalize the hospitals, many of which are in lower-income neighborhoods, the Los Angeles Times reported last year, at the time of the bankruptcy filing.
Nantworks hired a new CEO, CFO and COO and loaned $148 million to the hospital system.
“Despite the infusion of capital and new management, it became apparent that the problems facing the Verity Health System were too large to solve without a formal court supervised restructuring,” the bankruptcy filing said.
Verity bankruptcy filings indicated it had more than $1 billion of debt from bonds and unfunded pension liabilities and needed cash to make seismic repairs. It reported a $111.4 million operating loss in 2018, up from a $35.3 million operating loss in 2017.
The KPC Story
KPC came to own its four OC hospitals, totaling 762 beds, when it bought them in 2005 from Dallas-based Tenet Healthcare Corp. The privately held KPC rebranded each as a “Global Medical Center”: South Coast and Orange County GMCs in Santa Ana; Chapman GMC in Orange; and one in Anaheim.
Each offers comprehensive care. Among them, Orange County Global Medical Center, previously known as Western Medical Center, is one of only two Level II Trauma Centers in the county.
Its latest purchase of St. Francis will add another Level II Trauma Center in Los Angeles, allowing KPC Health to serve major trauma needs in both areas.