The Three-Headed Dog Will See You Now

Catholic hospital operator Caritas Christi this week agreed to sell itself to Cerberus Capital Management, in a deal Caritas Christi CEO Ralph de la Torre called “good news.”

Considering Caritas Christi’s new owner is named after a three-headed dog from hell, I’m sure the company’s 2,000 pensioners, 13,000 employees, and countless patients are praying he’s right.

In an internal email obtained by peHUB, de la Torre outlined the benefits of the $830 million deal and specific favorable commitments from Cerberus. The deal is a turnaround of the hospital, which has struggled to compete with large teaching hospitals in its region.

For its part, Cerberus has learned a thing or two about getting involved in sticky public turnaround situations. The firm famously took a beating with its failure of an investment in Chrysler.

Yet the old devil dogs are back for more. Aside from the dangers involved in buying non-profit, Church-affiliated organization that happens to be in the business of saving peoples’ lives, Caritas Chrisi is also one of the largest employers in the state of Massachusetts. The stakes seem pretty high.

And the way Cerberus did this deal may end up really helping, or really, really hurting them in the end. The firm appears to be pre-empting bad press by agreeing to some generous terms as part of the deal. They include:

• The firm will take on pension obligations for 12,000 employees

• The firm will keep management in place and allow all patient care and operating decisions to be made by doctors and hospital leadership

• The hospitals will retain their Catholic identities

• Cerberus will maintain current employment levels

• Cerberus will not cut residency programs or change the company’s physician network and relationships with third party vendors and service providers

• The company will continue its charitable care, community benefits and pastoral care

• Commitments of at least $400 million in capital projects, including $100 million for immediate capital projects

• Cerberus will hold the investment for three years.

It all sounds reassuring for the company’s employees and patients. But is it reassuring for investors? That’s a lot of rule-following and tight-rope walking for a private equity firm. The challenge seems daunting, because, think about it, when executing a turnaround, what do most firms do? They change management, find “fat” in the form of staff, services and programs and cut it, and change customer and vendor relationships. All things Cerberus is forbidden to do.

Failure to execute the turnaround while keeping its promises could generate the ire of the Massachusetts general public and even the Catholic Church. Even I’m terrified of pissing off the Catholic Church, and I went to Catholic School.

Cerberus’s investment experience in patient care companies is largely limited to the biotechnology sector. The firm won back a little dignity lost in the Chrysler bru-ha-ha with its $905 million IPO of Talacris Biotherapeutics, a maker of plasma-derived protein therapies formed by Cerberus in 2005.

The deal’s close requires regulatory and other governmental approvals, including public hearings to solicit feedback from the community. De la Torre said those would likely take a number of months. He urged employees to “redouble” their efforts during that time. “We can’t for a second assume that the ‘pressure is off’ and that we can declare victory.”