Charter to Resist CPC’s Bid to Buy, Remold the Chain

Comparing the business styles of Georgia-based Charter Medical Corp. and Community Psychiatric Centers is, as one medical industry analyst puts it, “like comparing Athens to Sparta.”

Danile Lemaitre, an analyst with Cowen & Co. in Boston, has visited both psychiatric hospital chains and found that they provide similar care.

The difference, he said, is that “Community Psychiatric operates with a much leaner overhead at the management level, perhaps 20% lower.”

“You go to a Charter hospital, and a staff of four marketing people will tell you about the facility’s marketing plans,” Lemaitre said. “You got into a Community Psychiatric facility, and the administrator says he handles the marketing.”

CPC of Laguna Hills on Thursday made an unsolicited, $1.1-billion buyout offer for Charter in a deal that would create the nation’s largest provider of psychiatric services.

A Charter statement said Friday afternoon that its directors had “unanimously determined not to enter into discussions” with CPC. The company cited possible antitrust problems and the “immediate and disruptive effect that discussions with CPC would have on Charter.”

CPC officials could not be reached for comment on Charter’s statement. But CPC Chairman James W. Conte said in an interview earlier Friday that he hopes to remold Charter in CPC’s image if the buyout is completed.

“We will want to change Charter’s way of working to our way,” Conte said. “When you have a 35% profit margin (like CPC), you don’t want to copy a company that seems to be going bankrupt.”

Conte said he would eliminate overlapping administrative jobs and slash costs by reducing Charter’s higher operating expenses, starting with the company’s historically large TV ad budget.

CPC’s stock closed Friday at $36 a share, up $2.25 in New York Stock Exchange trading.

The Laguna Hills company has become the nation’s lowest-cost provider of mental health services, while maintaining the highest profit margins in the industry, analysts said.

CPC is thriving despite pressures from insurance carriers to shorten hospital stays for the mentally ill as a way to control medical costs. In its fiscal year ended Nov. 30, CPC earned $83 million on revenue of $381.8 million; it earned $80.4 million on revenue of $330.7 million the previous year. The company is flush with cash, free from debt and has been looking for acquisitions at bargain prices.

But Charter, in contrast, has fallen on hard times. A few years ago, the Georgia chain was highly profitable and was considered to have a bright future, analysts said. But the company hit rocky times after taking on a $1.7-billion debt load as a result of a management-led, leveraged buyout in 1988. Last month, the company failed to make a $45-million interest payment on its debt.

Charter lost $311 million in its last fiscal year and $46.5 million in its most recent quarter.

Conte said Friday that CPC could finance the Charter acquisition without crimping its plans to achieve earnings growth of at least 15% annually and that the combined entity would generate sufficient cash flow to pay off any debt from the acquisition in three to five years.

By combining CPC’s 50 psychiatric hospitals with Charter’s 88 facilities, Conte said, the merged firm would have more leverage in negotiating contracts with health maintenance organizations and other health insurance plans.

The combined entity would have 13,000 psychiatric beds, giving it about a 31% share of the U.S. market.

For their part, Charter officials said Thursday that they do not need help repairing the company’s finances. Last summer, they said, Charter embarked on a cost-saving program that is beginning to show results in improved hospital occupancy and operating earnings. Mac Crawford, a Charter executive vice president, said occupancy rates at Charter clinics have improved from about 40% last summer to 60% now.

The company laid off 2,600 full-time employees last year, but Crawford said Charter intends to maintain a higher staff-to-patient ratio than CPC, reflecting its “different operating philosophy.”

Crawford said the company also slashed its TV ad budget from $52 million last year to $35 million this year. He said the company is relying more on patient referrals from psychiatrists, psychologists and other professionals.

During the past six months, Charter has landed a number of new contracts with insurers, Crawford said, although he declined to name them, citing “competitive reasons.”

For its first quarter ended Dec. 31, the company posted operating income of $46 million, up sharply from $14 million in the previous quarter. “We have had a very significant turnaround at this company,” he said.

But Crawford acknowledged that the cost-reduction efforts are offset by interest payments estimated at about $212 million annually. The company has developed a plan to eliminate $700 million in debt in a deal that would give its bondholders a 73% equity stake in the firm.

The restructuring would “reduce the cost of debt service and free up capital for strategic long-term investment in the company’s operation,” Charter spokesman Andy Brimmer said.

Some analysts said that while CPC’s $1.1-billion offer is about half what Charter’s management paid for the company in 1988, the company’s bondholders might pressure the firm to accept the offer in hope that CPC’s management could breath new life into the organization.

But Charter officials apparently disagree. In a statement Friday, Charter Chairman William A. Fickling Jr. said: “Given the differences between our companies’ approaches to health care, we believe that any discussions with CPC would be unsettling to our employees, doctors and health care professionals, and would place the company at a severe competitive disadvantage at a time when its operations are showing strong improvement.”

Fickling said Charter directors “unanimously determined not to depart from Charter’s strategy of seeking value for shareholders and creditors through Charter’s previously announced restructuring.”

Charter officials have contended that the proposed merger could by blocked by the federal government because of antitrust concerns. “Forty-two of our hospitals are west of the Mississippi, and in over 20 markets we feel there are significant antitrust concerns,” Brimmer said.

But CPC officials said they do not consider Charter a major competitor because most of Charter’s hospitals are in the Southeast, while CPC’s operations are in the West.