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March 25, 2010 7:08 PM

Schulte, McDermott, Manatt On the Cerberus Venture into Catholic Health Care

Posted by Zach Lowe

Schulte Roth & Zabel advised longtime client Cerberus Capital Management in the private equity giant's first ever foray into the health care business--an $830 million deal to acquire a Boston-based group of Catholic community hospitals, according to lawyers on the deal. McDermott Will & Emery advised the target, Caritas Christi Health Care, which operates six Massachusetts hospitals that adhere to various Catholic health care rules, including a ban on abortion, according to the Boston Globe, which broke the news of the deal this morning. The acquisition is believed to be the first instance of a private equity firm buying a nonprofit hospital, according to lawyers on the deal.

Schulte has served as Cerberus's longtime M&A counsel, including advising Cerberus on its acquisition of a majority stake in Chrysler in 2007, according to our prior reporting. Marc Weingarten, the lead Schulte partner on the Caritas Christi deal, declined to comment. The deal requires regulatory approval from Massachusetts and the Catholic Archdiocese of Boston, according to the Globe. Helping on that end will be Manatt, Phelps & Phillips partner Daniel Higgins, who specializes in health care transactions. Higgins has worked on several deals involving Catholic-run hospitals, and such deals present a ton of thorny issues.

For one, Cerberus is transforming the six hospitals from nonprofits into for-profit institutions. The hospitals will lose various tax exemptions, including property tax breaks, by shedding their nonprofit status, according to lawyers on the deal. (As an aside, hospitals in most states must give out a certain level of care for free in order to maintain their status as a nonprofit and receive the tax breaks that go with it. The Caritas Christi hospitals will no longer be bound by such rules, but Higgins says Cerberus has no intention of cutting back on charity care for the poor. "These hospitals have to work for their communities in order to do well," Higgins says. "They will continue to support their communities.")

Cerberus has vowed to follow Catholic rules for care, including the ban on abortions, the Globe says. 

Ira Rappeport, the lead McDermott partner on the deal for Caritas Christi, did not return messages seeking comment. 

The $830 million price tag includes pension liabilities and about $440 million to pay off Caritas debt and finance various improvements. Cerberus has also pledged to pour in nearly another $400 million over the next four years for further improvements, the Globe says.

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