A number of readers in recent days have asked us to comment on the acquisition of Caritas Christi by Cerberus Capital Management and have shared insider information to help us. We do not know if this deal is a good one or a bad one for the Archdiocese and Caritas. When something sounds too good to be true and when the Boston Globe and Massachusetts legislators all say positive things about something the Catholic Church is doing, it is usually reason to be concerned. So given the stakes—hundreds of millions of dollars in value for Caritas (which the Archdiocese will evidently never see), along with the prospect that Catholic non-profit/charitable healthcare in Boston will end 3 years from now—we feel compelled to report that a lot of questions should be answered publicly before this becomes a done deal. The final public hearing is Thursday, July 1, at 6pm in Dorchester. Below is our Top 10 list. If and when these 10 questions are answered publicly, priests, laity, and politicians will probably find some surprises, but you can be certain that complete answers will not be forthcoming.
1. What is Cerberus’ internal plan, exit strategy, and timeframe for the Caritas investment?
Cerberus is a private equity firm. They invest money in undervalued businesses, and then sell the businesses a few years later to generate a return on their investment. They get in and eventually they get out with what’s called an “exit strategy.” Period. Leopards do not change their spots. They are not another hospital chain that wants to operate Caritas forever as part of their business strategy and focus. Cerberus has an internal investment plan for Caritas, approved by Cerberus’ general partners, that maps out what they plan to invest, how they expect to see the value of Caritas increase, and what they hope to realize in gains when they exit Caritas after some number of years. What is that plan, strategy, and timeframe?
2. What are the financial goals that Dr. de la Torre and the Caritas management team are incented by Cerberus to achieve over the next 3-5 years, and what are the monetary incentives for the team if they hit them?
When the agreement was announced and questions were asked about the financial goals for Dr. Ralph de la Torre, CEO of Caritas, the response was that these goals were still being worked out. Certainly, by now those goals are known. What equity stake, if any, do Dr. de la Torre and the management team have in “new Caritas” and what do they stand to make in a future sale of Caritas by Cerberus?
3. Who actually “owns” Caritas Christi?
According to the published investment agreement, the Archdiocese of Boston sees not one penny from this transaction—all of the funds invested go to Caritas. It is as though Caritas is owned by Caritas. A reorganization in 2008 changed the governance structure, but it was not stated at the time that the 2008 reorg changed the ownership structure. Did the Archdiocese ever “own” Caritas? If so, what happened to change that, what happened to the value of the assets, and when did it occur?
4. What is the actual book valuation of Caritas, and why does the Archdiocese realize none of that value from this sale?
According to a Catholic finance expert we recently consulted, a look at the 2009 annual report by Caritas available at the State of Massachusetts website shows Caritas has a positive valuation of hundreds of millions of dollars, which the Archdiocese will not see as a result of this transaction. The report lists assets of $924 million, and debts and liabilities of $664 million. So when you subtract assets from debts/liabilities, you get a net asset value of $260 million. In other words, hypothetically speaking, if you shut down the system, liquidated investments, paid off debts, and sold off everything (since effectively that’s what will potentially happen to “Catholic healthcare” as we know it in Boston after 3 years anyway), on paper it would be worth about $260 million after all the bills were paid. But since Caritas generated profits of $30 million last year and could easily generate profits in excess of $50 million annually for the next 10 years ($500 million in profits over 10 years), the present value of the Caritas healthcare system is many hundreds of millions of dollars—perhaps as much as $500M or more. Take even $50 million of that to subsidize the shortfall in the Clergy Retirement Fund, and you’ve done something really good. But, the Archdiocese is getting zero. It is not clear what the net present value of Caritas is, and what aspect of the present ownership structure removes the Archdiocese from any stake in that value.
5. Is the Caritas deal financially a good deal for the Church, and how does it compare to other similar healthcare purchases?
Since this archdiocese already has some experience under-valuing assets it has sold (e.g. sale of St. Mary Star of the Sea in East Boston for $850,000, which was “flipped” and resold by the buyer for $2.65 million just weeks later), it is reasonable to ask if the Cerberus transaction is a bad deal, a fair deal, or good deal for the Archdiocese and Caritas. There’s a short report by a consulting firm, Navigant, engaged for a long time by Caritas to help with their strategic direction which says they did a lot of homework and concluded in one sentence that it is a“fair” deal, but it gives none of the findings or information to justify that conclusion. Why haven’t the full findings of the report by Navigant Capital Advisors been released to the public? When will it be released?
6. : How much of the $830 to $850 million investment publicly announced is expected to come from Caritas current assets, internal funds and future operational profits, and how much is from Cerberus’ own funds?
$830-850 million in investment sounds awesome—at least at first. So, is that $830-850 million how much Cerberus is spending out-of-pocket to acquire Caritas? No, not really. Cutting through the smoke, it’s unclear what the Archdiocese and Caritas are actually netting from this deal. We know that Cerberus will provide $430-$450 million as “consideration for the assets and operations of Caritas” which will help fund operations and capital projects, assume pension obligations for current and former employees, and pay down Caritas’ debt.
Our finance expert reminded us that no one is mentioning publicly that Caritas has $295 million in “current assets” today, including cash, accounts receivable, and short term investments. There’s another $208 million in financial assets whose use is limited. So, straight away, Cerberus is getting their hands on $503 million in financial assets from Caritas when they walk in the door. Not too shabby. Does the $830 million to be spent include any of the $503 million already sitting in the bank which becomes a Cerberus asset after the deal is done? We do not know, but the answer is probably yes.
In addition, Caritas generated $30 million in profits last year and should easily hit $50 million, especially when they do not have to pay interest on $240 million in long-term debt. So, over the next 4 years, we can assume there is $200 million in profit to also work from. Add $200 million in profit to $500 million in available assets and you have $700 million to reinvest that is right there in Caritas. Though Cerberus probably will not liquidate all of Caritas’ financial assets and is indeed bringing some new cash to fund operations and capital improvements, the net is that a good part of the spending of $830-850 million appears to be available already on Caritas’ books. The agreement says “From the Closing Date until the fourth anniversary of the Closing Date, Purchaser shall cause the Health Care System to spend or commit to spend no less than $400 million” but that money is not coming from Cerberus—it’s designated as coming from the Caritas healthcare system itself—which means existing assets and/or future operating profits. We are no Warren Buffet when it comes to finance and could be dead wrong here, but in the end, Cerberus may be bringing only about $130-150 million in new funding, not nearly the $830-850 million touted publicly. That would be only slightly more than the $100 bond issue previously planned by Caritas for this year.
7. If Cerberus fails to make the promised capital investments over the next four years, why does the Massachusetts Attorney General get to choose where that shortfall is donated?
This is the part that makes the least amount of sense of anything in the whole agreement. Section 8.8b says, “To the extent that, by such fourth anniversary, Purchaser has failed to cause the Health Care System to spend or commit to spend no less than $400 million as provided in Section 8.8(a), Purchaser shall cause the Health Care System to contribute such shortfall to a charitable foundation designated by the Massachusetts Attorney General.” In other words, if Cerberus doesn’t spend $200 million on improvements they committed to make to the Caritas Catholic healthcare system as part of the deal, Martha Coakley can decide to give that $200 million to the National Rifle Association or the National Organization of Women, or whomever the heck she pleases? Who died and left Martha Coakley in that position of responsibility? Why don’t those committed funds go back to the Archdiocese of Boston? If Cerberus drops the Catholic identity, $25 million goes to a charity of the Archdiocese’s choice, but if they reneg on a couple hundred million of investment in the system, the Attorney General decides where that shortfall goes? This makes no sense whatsoever.
8. Who is responsible for maintaining the Catholic identity and adherence to Catholic religions and moral directives?
Of the 7 members of the Board of Trustees of the new entity, 5 are Cerberus people, one is the CEO of the hospital (who stands to benefit financially from the whole transaction), and one is president of a real estate development company. None has any theological training or background listed in their biographies, and several have public records of contributing to campaigns of pro-abortion politicians. Based on the transaction documents, these are the people who appoint a committee to work on maintaining the Catholic identity–which sounds a lot like the fox picking the animals who will guard the chicken-coop. Should there not be at least a few people with unquestioned Catholic theological background and judgment named up-front?
9. Does the Archdiocese acknowledge or deny that the Catholic identity for Caritas will likely disappear after 3 years?
A blog at the Wall Street Journal said, “In Hospital deal, How Much is a Catholic Identity Worth: Just 3%.” Despite comments by Vicar General Fr. Richard Erikson and Fr. Bryan Hehir saying the stewardship agreement “memorializes” the commitment to maintain the Catholic identity of Caritas Christi and represents a strong commitment to operate the hospitals according to Church religious and moral directives, the exit clause that allows Cerberus to pay $25 million to drop the Catholic identity negates what both officials have said. So, let us be realistic that the proposed guarantees for maintaining the system’s Catholic identity beyond 3 years are lacking in substance and credibility. It feels like the tale of “The Emperor Has No Clothes.” Everyone says the emperor looks handsome in his new clothes. Perhaps it would be better to stop pretending this arrangement is something which it clearly is not.
Readers may agree or disagree with the Catholic Action League on their positions and approaches to various issues, but their message on this one seems to merit repeating, just as a reality check:
This impending transfer of ownership means that the future of 150 years of Catholic health care in Boston will be within the discretionary authority of a non-Catholic, for profit, out of state, capitalist corporation. It is now clear that Caritas Christi will be rapidly secularized, that such iconic Catholic institutions as Carney Hospital and St. Elizabeth’s Medical Center will no longer defend the culture of life, and Catholic and other pro-life doctors, nurses, and administrators will lose their conscience protections.”
This comes just five years after Catholic Charities withdrew from adoption services in Greater Boston. Beautiful and historic churches are being closed, the parish based Catholic school system is being effectively downsized into ‘consolidated’, lay-governed regional academies, and now the Catholic hospital system, which dates back to 1863, is about to be abandoned. A two hundred year legacy of Catholicism in Boston, as reflected in an institutional infrastructure, is being systematically dismantled and improvidently discarded.
10. Given the recent financial prosperity reported by Caritas, why does this transaction need to happen?
In February of 2010, Caritas and the Boston Business Journal reported that Moodys upgraded their long-term bond ratings.
The upgrade reflects the turnaround in financial performance in FY 2009 and our belief that this new level of performance is sustainable. Moody’s said the hospital group has better cash flow to cover its debt service and experienced an upswing in unrestricted cash and its investment position, $235.3 million compared with $172 million at the end of fiscal 2009. Moody’s said its analysis takes into consideration a potential $100 million bond issue during fiscal 2010.
This assessment would seem to undermine the “cash poor” rationale for the sellout. Caritas says they need the capital, but Caritas already had a credible plan to raise additional funds for capital improvements via a bond issue . What gives?
We are not saying if the Caritas sale is the right thing or the wrong thing for the Archdiocese of Boston and the Caritas Christi Healthcare System. At this precarious time for the needy of the state and for the Archdiocese–with layoffs pending, a $25 million shortfall in the Archdiocese’s pension fund and a $100 million shortfall in the Clergy Retirement Fund–this transaction is getting very little public financial scrutiny. For an archdiocese that talks a lot about transparency, this does not feel very transparent. We are simply saying these 10 questions should be asked and answered publicly by the Archdiocese, Caritas, the Attorney General, and Cerberus for the sake of the Catholic Church, Caritas employees, non-profit charitable healthcare in Boston and for all stakeholders.
The final public hearing is Thursday, July in at the Local 103 IBEW Hall in Dorchester at 6pm. All readers concerned about this transaction should make it a point to attend and speak out. See comments by Benhamin for more information on that hearing and about how to submit your opinions.
Boston Catholic Insider 