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Tenet bids $465 million on 8 AHERF hospitals

Thursday, August 13, 1998

By Pamela Gaynor, Post-Gazette Staff Writer

A second for-profit hospital operator formally entered the bidding late yesterday for the Allegheny Health Education and Research Foundation's eight bankrupt Philadelphia hospitals.

Tenet Healthcare Corp., based in Santa Barbara, Calif., made a $465 million offer, according to documents filed in federal bankruptcy court.

Looking just at the proposed price, the Tenet bid beats the $460 million offer that AHERF received last month from Nashville, Tenn.-based Vanguard Health Systems Inc. by $5 million.

Some other terms of the Tenet proposal were also more favorable, according to creditors who yesterday asked Judge M. Bruce McCollough to slow down AHERF's proposed timetable for selling the hospitals. McCollough had been expected to rule at a hearing today on an auction process and timetable that AHERF proposed last week.

Creditors also may find out at today's hearing whether Judge McCollough grants state Attorney General Mike Fisher permission to intervene in the bankruptcy proceedings. Fisher's office is responsible for determining what portion of the bankrupt hospital's assets are considered charitable assets.

When a non-profit institution is sold to a for-profit buyer any charitable assets must be withdrawn and set aside for charitable purposes.

Under AHERF's proposal, the Philadelphia hospitals would be auctioned Sept. 14 and the bankruptcy court would approve the sale the following day. AHERF said the sale would have to proceed at that pace to meet a Sept. 30 closing deadline that was among the terms of Vanguard's offer. Among other conditions, AHERF's proposal also would require any new bidders to top Vanguard's offer by at least $7.5 million and bid either for all eight of the hospitals or for either of two groups into which they have been separated because of their different debt obligations.

Creditors called those conditions too restrictive. A committee of creditors, in court documents, said it "recognizes that swift action may be necessary here ... to put a rapid stop to ongoing operating losses."

But going too fast and putting too many bidding restrictions in place could result in "a chilling effect on competitive bidding and, ultimately, a failure to realize the best possible results in the sale process."

The committee said that in discussions with Radnor, Pa.-based Catholic Health East, for example, the health system said it could not meet the timetable and found AHERF's proposed bidding procedures "onerous and prohibitive." Catholic Health East has expressed interest in AHERF's St. Christopher's Hospital for Children.

The creditors also suggested that more bidders might emerge if they were not required to bid on all eight hospitals or the two groups into which they are separated.

The creditors noted that Tenet has made its offer "on what appear to be materially better terms and conditions than those set forth in the Vanguard proposal, including greater aggregate cash consideration, more flexible and open bidding procedures and a less accelerated auction, sale and closing schedule."

Among those terms, Tenet would provide the Allegheny University of the Health Sciences, which is also among AHERF's bankrupt properties, with $30 million over 90 days to help it re-establish itself as a freestanding not-for-profit entity. Vanguard's offer would provide $20 million in the university's first 60 days as a restructured operation.

Tenet spokesman Harry Anderson said his company believes its experience operating teaching hospitals and hospitals in several distressed urban locations will also distinguish it as a bidder.

Vanguard is a start-up company, though its top managers have considerable experience in the for-profit health care sector.

One of AHERF's bankruptcy attorneys, Philip Beard, said AHERF had worked most of yesterday with creditors to come to common ground on bidding procedures and a timetable for selling the Philadelphia hospitals.

"The creditors and the debtor really have the same objective -- to sell these properties at the earliest possible date for the best possible price," he said.

How early the sale can take place will also depend on whether McCollough grants the state attorney general permission to intervene. Fisher's office is responsible for determining what portion of the bankrupt hospital's assets are considered charitable.

When a nonprofit institution is sold to a for-profit buyer, any charitable assets must be withdrawn and set aside for charitable purposes.

His need to assess that could not only delay a sale but reduce the proceeds available to settle creditor's claims.

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