Private equity firm to acquire LA-based Prospect Medical

True to expectations, private equity firms continue to make inroads into the hospital market. The influx of private equity will give hospitals the leeway to make information technology and other investments, as well as prepare for new payment models, Christopher Jedrey, a partner at law firm McDermott Will & Emery, told the Wall Street Journal. The spate of merger-and-acquisition activity among hospitals represents the "provider side bulking up to catch up with the payer side" in terms of consolidation.

In the latest move, private equity firm Leonard Green & Partners has signed a definitive merger agreement to acquire Los Angeles-based Prospect Medical Holdings for $8.50 per share in cash. The transaction is valued at $363 million, including the assumption of $158 million in net debt. Leonard Green made the deal in concert with members of the Prospect management team who own an aggregate 10.4 million shares of Prospect's common stock. These management shareholders have agreed to approve the merger and to exchange approximately 6.2 million of their Prospect shares for equity interests in the new company instead of a cash payout.

Prospect's board of directors approved the merger agreement based on the unanimous recommendation of a Special Committee of independent directors. The merger price "represents a 38.9 percent premium over the closing sale price of Prospect shares on August 13, 2010, and a 29.4 percent premium to the volume weighted-average closing sale price of approximately $6.57 during the 30 trading days prior to that date," said the company in a press release.

However, no fewer than five law firms have launched investigations into the sale, reports the Los Angeles Business Journal. The common theme is that the deal may be underpriced. Under the merger agreement, Prospect can obtain competing acquisition proposals from third parties through Sept. 25.

In addition to providing management services to independent physician associations, Prospect owns and operates five community-based hospitals with a total of 759 licensed beds in Los Angeles County. Prospect's licensed beds had an occupancy rate of 51.4 percent for third-quarter 2010 (3Q10), down from 52.7 percent in 3Q09, according to Securities and Exchange Commission (SEC) filings. The company reported 3Q10 consolidated revenues of $116.9 million, up 2.3 percent from $114.3 million in 3Q09. Net income totaled $2.8 million for 3Q10 vs. a net loss of $0.2 million for 3Q09.

In other private-equity news, Boston-based Cambridge Health Alliance, a three-hospital public health system, is in ongoing talks with Caritas Christi Health Care about setting up a strategic partnership or sale, reports the Boston Globe. Caritas' own sale to New York-based private-equity firm Cerberus Capital Management is still pending.

And Vanguard Health Systems, which is backed by the Blackstone Group, has bought two Chicago hospitals, as well as signed definitive agreements to buy the Phoenix-based Arizona Heart Hospital and the cardiology practice the Arizona Heart Institute, all while waiting to close on its purchase of Detroit Medical Center, reports the Wall Street Journal.

To learn more:
- read this Wall Street Journal blog post
- read this Los Angeles Business Journal article
- take a look at these Prospect press releases: release 1 and release 2
- review these law firm press releases: release 1, release 2 and release 3
- review Prospect's related SEC filings
- read this Boston Globe article