Medical Property Trust enables $2 bln merger between Cerberus’s Steward, TPG’s IASIS

TPG Capital has finally maneuvered a deal to cash out of its longtime investment in IASIS Healthcare in a transaction made possible by and large by healthcare REIT Medical Property Trust.

The buyer is Cerberus Capital Management’s community-based healthcare system, Steward Health Care.

The deal, announced Friday, is valued north of $2 billion including assumed debt and accounting for working-capital adjustments, Buyouts has learned.

In a separate $1.4 billion transaction, MPT plans to buy the real estate interests of most of the facilities IASIS operates and lease them back to the company. The sale-leaseback includes a $700 million consideration for nine hospitals that will be leased back to Steward. The new mortgage loans will account for the remaining $700 million. The REIT also is making a $100 million preferred-equity investment in Steward.

For TPG, the deal comes almost 13 years after it took IASIS private in a $1.4 billion transaction, alongside minority investors JLL Partners and Trimaran Capital Partners.

TPG reportedly sought to sell IASIS in 2012 but a deal never came to fruition. The sponsor subsequently filed to take the company public in 2015, but that process was also called off.

The deal that came together on Friday is based on MPT’s desire to facilitate growth, sources said. One source described the merger as more of a real estate play than a hospital play.

While the deal structure means Cerberus is taking on the risk of committing to rent obligations, turning to MPT is a less expensive and more flexible source of financing versus traditional bank financing, another source said. The transaction would have otherwise been difficult to justify based on the target’s high leverage and hospital metrics, this person said.

MPT knows Steward well, having invested $1.25 billion in the hospital operator last fall. It was that financing that enabled Cerberus to focus on IASIS, while also allowing Cerberus to return capital to LPs on what has now been an about seven-year investment in Steward. The company paid $830 million for the community hospital operator in 2010.

While interest from sponsors looking at IASIS as a platform investment was said to have been muted, the hospital company also likely offered more strategic value to Steward than any of the industry’s major hospital players.

Industry leader HCA Corp tends to go after iconic hospitals in dense populations, and Tenet Healthcare remains highly levered. Meanwhile, Community Health and Quorum Health have been divesting hospitals to pay down their debt loads.

The big hospital operators also likely had no interest in buying Health Choice, the insurance platform IASIS operates, sources said. Steward, on the other hand, can leverage Health Choice by rolling it out across its existing network. Steward also gains scale and can apply its physician-based network model in the new facilities.

The combined entity will encompass 36 hospitals across 10 states, as well as managed-care operations in Arizona, Utah and Massachusetts. The transaction will create what Steward claimed will be the largest private for-profit hospital operator in the U.S., with $8 billion of projected revenue in 2018.

Citi is providing financial advice to Steward and is providing committed financing to support the transaction. JP Morgan Securities is offering banking advice to IASIS.

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