ProMedica Finalizes $3.3B HCR ManorCare Acquisition

The joint venture with WellTower is being hailed as a 'first-of-its-kind partnership' and it gives not-for-profit ProMedica immediate scale in the fast-growing home health and post-acute care markets.

ProMedica Health System this week finalized its acquisition of bankrupt HCR ManorCare in a $3.3 billion deal that makes the 13-hospital, Toledo-based health system one of the largest in the nation by revenue.

The joint venture with real estate investment trust WellTower was hailed as a "first-of-its-kind partnership" when it was announced this spring, and it gives not-for-profit ProMedica immediate scale in the fast-growing home health and post-acute care markets.

"I hate to say we are in uncharted waters here, but it seems to be a unique, first-of-its-kind partnership. A nonprofit health system, a large post-acute provider and a real estate investment trust as partners is unique," ProMedica CEO and President Randy Oostra said in an interview with HealthLeaders Media this spring.

"We are in a non-growth market. How do we grow as a system? How do we begin to diversify? We have a health plan, we have hospitals, we have a physician group. Being more diversified in this space made sense," he said.

Toledo-based HCR ManorCare is the nation's second-largest provider of post-acute and long-term care. The company filed for bankruptcy protection in March with $7.1 billion in debts, owing largely to declining Medicaid and Medicare reimbursements. Its real estate assets were held by its landlord, Quality Care Properties.

S&P Global Ratings notes that HCR has annual operating revenues of about $3.7 billion, which doubles ProMedica's overall revenue base.

The acquisition creates a $7 billion not-for-profit healthcare network with 70,000 employees in 30 states, making ProMedica the 15^th largest health system in the nation, as measured by annual revenues, ProMedica said.

Under the deal, Welltower owns 80% of the HCR real estate and ProMedica has a 20% stake, while ProMedica owns 100% of the HCR's operating company. The health system is using $470 million of cash and a $1.15 billion one-year bridge loan with Barclays to pay for the acquisition.

S&P said this week that its "A+" long-term ratings for ProMedica would hold unchanged with the deal's closure, but that could change because the ratings are now on CreditWatch with negative implications.

"While the CreditWatch Negative listing implies there is at least a one-in-two chance of a downgrade, we note a downgrade of more than one notch is possible, given the significant additional debt and cash usage to fund the acquisition," S&P said Friday. "In addition, the transaction involves other risks, including integration, and expansion into a new businesses sector that has faced significant challenges."

On the upside, S&P said the deal would diversify ProMedica into the post-acute care space, improve cash flow, and take advantage of synergies if the health system sells off money-losing HCR assets.