Plan to Acquire San Clemente Hospital Gets Tentative OK

The purchase of a controlling interest in San Clemente General Hospital by a group of staff physicians has been tentatively approved by U.S. Bankruptcy Court in Dallas, over the objections of another physician group that submitted a competing bid.

Bankruptcy Judge Robert C. McGuire favored a $26.4-million acquisition proposal submitted by a group of staff doctors allied with National Healthcare Properties, a real estate investment firm formed to acquire hospitals in partnership with doctors.

In a written decision issued late Tuesday, McGuire said the National Healthcare offer, which involves a combination of cash and notes, “appears superior” to a $21-million all-cash bid made by the competing physician group.

McGuire said the National Healthcare offer “will ultimately result in a greater return” to American Healthcare Management, which owns the 116-bed San Clemente General. The Dallas-based chain of 26 hospitals is in bankruptcy reorganization.

The hospital chain supports the National Healthcare proposal, which would allow the chain to retain a 50% interest in the hospital’s real estate holdings and also its future profits while turning over control of hospital operations to staff physicians.

The competing offer, made by a group known as Physician Associates Committed to Excellence, would have involved a complete buyout of the hospital. After the change of ownership, San Clemente General would have been leased to a nonprofit hospital management company.

National Healthcare and American Healthcare Management officials interpreted the judge’s decision as a clear victory for their proposal.

“I’m tickled to death. It is absolutely a ruling in our favor,” said Dr. Ron McGee, a San Clemente family physician leading the National Healthcare physician group.

“I can’t understand why the other side doesn’t just throw up their hands and say they have lost. I couldn’t be more pleased,” said David Huff, president of American Healthcare Management.

But representatives of the competing physicians’ group said they are not ready to give up. They said they are pinning their hopes on “concerns” cited in the judge’s written decision. Those concerns must be addressed by National Healthcare before the proposed purchase can go forward.

The judge said he wants documentation involving a $5-million note that the physicians will be obligated to pay off as part of the purchase. The judge also said he wants “a meaningful” time limit proposed for closing the transaction.

In the meantime, the judge said, the Physician Associates group should be permitted to examine the hospital facilities--a consideration that the group interpreted as a signal that its proposal would be considered should the National Healthcare proposal fall through.

“At this point, there isn’t any financing to consummate the (National Healthcare) deal,” said David Gordon, vice president of John Nuveen Co. Inc., a Chicago investment banking firm that represents the Physician Associates group.

Gordon said his group is skeptical that National Healthcare will be able to satisfy requirements imposed by Citicorp, its proposed lender.

Huff and McGee, however, said that they believe that the judge’s concerns are only “technicalities” that can be easily addressed. Huff said Citicorp and the National Healthcare group have agreed upon loan terms. Citicorp is to lend the group $28.5 million, of which $21 million would be used for the acquisition and the remainder for facility improvements and working capital.

Huff said he expects to address the judge’s concerns within the next two weeks and to complete the purchase in the next 60 to 90 days.

The judge has already overruled objections raised by American Healthcare Management’s unsecured creditors, a group of banks led by Chase Manhattan.

In his decision, the judge noted that “physician unrest” at San Clemente General Hospital has contributed to a continuing downturn in the hospital’s earnings since 1986 and that its emergency room needs about $900,000 in repairs and improvements.

“At best,” he wrote, “San Clemente General Hospital is a tarnished jewel needing substantial rehabilitation by major capital improvements from funds not available to (American Healthcare Mangement) or San Clemente General Hospital in the reasonably foreseeable future.”