O.C.-Based CPC Bids $1.1 Billion for Competitor

In a bid to become the nation’s largest provider of psychiatric services, Orange County-based Community Psychiatric Centers has made an unsolicited, $1.1-billion buyout offer for troubled Charter Medical Corp. of Macon, Ga.

A combination of the two companies would create a psychiatric hospital giant with 139 hospitals and combined annual revenues of $1.56 billion. Both companies have facilities in Orange County. CPC’s operations are concentrated in the West and Charter’s are primarily in the East and Southeast.

The proposed takeover is a bold effort by CPC, which is about a third of the size of Charter, to become the nation’s largest psychiatric care company. If successful, the takeover would be the largest ever by an Orange County-based company.

“By merging with Charter we can with a single stroke become the only true national provider of psychiatric health-care services,” said James W. Conte, chairman and chief executive officer of CPC.

But Charter reacted coolly to the offer. A spokesman for Charter termed the buyout proposal “highly conditional” and “unrealistic.” And he said the attempted acquisition by CPC would result in “destabilization” of Charter.

The offer comes at a time that Charter is trying to implement a restructuring of its $1.7-billion debt. The company, which lost $311 million in its last fiscal year and $46.5 million in the last quarter, has been struggling under a huge debt load since it underwent a management-led leveraged buyout in 1988.

Industry analysts said it was unclear whether CPC would be successful if Charter’s management resists its overture, but they added that it was financially strong enough to make such a combination work.

“Any company that is having as much trouble as Charter is clearly on the sales block,” said Rae Alperstein, analyst with Kemper Securities Group in Los Angeles. “Community has been looking for acquisitions and is a well-managed company with a lot of cash. By making this offer, it is forcing the hand of Charter’s management.”

Todd B. Richter, a senior health service analyst for Dean Witter in New York, said the meshing of the two would be difficult because of a likely “clash of corporate cultures.” Still, he said he has a lot of confidence in CPC’s management.

But Charter’s spokesman said the company feared that CPC’s offer would cause a delay in the financial restructuring. Still, the spokesman said Charter’s board “will meet soon” to consider the Coffer from CPC, its largest competitor.

In a letter to Charter, Conte said CPC’s offer was contingent on a review of Charter’s books. He said the buyout offer would expire April 1 and CPC reserved the right to withdraw it at any time.

Conte said CPC made its offer for Charter public Thursday because it had been unable to get the Georgia company to engage in “meaningful discussions.” He said he previously met with Charter Chairman William A. Fickling Jr. and expressed an interest in acquiring Charter.

“We haven’t had much luck going through the front door,” Conte said.

CPC proposed to pay for Charter with a combination of cash and common stock. Conte said CPC’s offer would be much better for Charter’s shareholders and creditors than the proposed restructuring plan.

While CPC said few of the two company’s market areas overlap, the Charter spokesman said that Charter considers CPC to be its largest direct competitor and believes that the merger proposal raises antitrust questions.

Taken private in a leveraged buyout three years ago, the once-profitable Charter has been battered by insurer’s efforts to reduce medical costs by limiting hospitalization for treatment of mental illness. The company particularly has suffered from a backlash against its aggressive media advertising in pursuit of the adolescent market.

In contrast, CPC has successfully weathered the storms of its industry through strong management and its focus on building its business through physician referrals, keeping down operating costs and virtually shunning all advertising, analysts said. The company takes pride in being among the lowest cost providers of psychiatric care.

Charter has 89 psychiatric hospitals and 12 acute-care hospitals in the United States, England and Switzerland. It has two hospitals in Orange County.

CPC has 50 psychiatric hospitals in the United States, Puerto Rico, and the United Kingdom and Great Britain. It has eight hospitals in Orange County.

Conte said CPC probably would sell Charter’s nine acute-care hospitals and facilities where the companies’ geographical markets overlap if the acquisition is successful. Analysts said those sales could reap $300 million.

Charter has sold several hospitals and laid off more than 2,600 employees in the last 15 months in an effort to pare back operating costs.

The company’s debt includes $1.1 billion in junk bonds issued to finance the leveraged buyout led by Fickling. Charter also had outstanding bank loans and said late last year that it was unable to borrow any more money from its lenders and could not generate the cash necessary to meet fiscal 1991 debt payments.

In addition to its financial difficulties, Charter has run afoul of the SEC and the federal health regulators. In August, the company said the SEC had launched a review of the 1988 leveraged buyout that created its huge debt, and in January, the company said it had agreed to pay the Medicare program $948,000 and to forgo an additional $850,000 in Medicare reimbursements to settle an investigation into allegations that it had routinely inflated Medicare and Medicaid bills.

In the fiscal year ended Nov. 30, CPC reported net earnings of $83 million on revenues of $381.8 million, compared to net income of $80.4 million on sales of $330.7 million.