Has Obama-Care M&A Already Started?

When Congress passes major legislation that greatly affects industries, it often creates rich opportunity for mergers and acquisitions (M&A). This appears to be the case with the $938 billion health care plan that President Obama signed into law the earlier this week.

Dealmakers already look poised to announce a variety of transactions. Just look at private equity firm Cerberus Capital, which agreed to commit $830 million for the Boston-based hospital chain Caritas Christi Health Care. The deal involves the assumption of pension obligations, the retirement of debt and $400 million for capital projects and improvements.

An Unholy Alliance?

With a history that goes back to the 1600s, Caritas now runs six hospitals in New England. Its mission has been to focus on the less fortunate, which has made it difficult to produce profits. For much of its history, Caritas has been cash-flow negative.

In light of budgetary and competitive pressures, the hospital chain has been seeking capital partners. So why not private equity?

While there are concerns, it looks like Caritas negotiated a good deal. For example, Cerberus has agreed to maintain the organization's Catholic ideals and to not sell the chain for at least three years. The deal will also have a rigorous approval process, which will involve the Attorney General, the Department of Public Health and even the Archbishop of Boston.

Such requirements are uncommon for private equity transactions. Then again, Cerberus must see the potential for a lucrative turnaround.

The first step will be to convert Caritas to a for-profit organization. Next, will be a restructuring, which Cerberus has lots of experience with. A recent example is the $90 million purchase of Talecris Biotherapeutics Holdings (TLCR) back in 2005. After extensive cost-cutting and strategic repositioning, the company got back on track and was able to launch an IPO last year. The current market value is $2.4 billion.

But something else is even more important. Under the Obama plan, about 32 million uninsured Americans will get coverage. The upshot is that ailing hospitals will get an influx of patients who have the ability to pay. Bad debt is often the biggest problem for hospitals, especially those that cater to low-income communities.

More Deals to Come

Like any legislation, the Obama plan isn't without its complications. Hospitals will face some pressure because of reductions in Medicare payments. At the same time, illegal aliens will not be allowed to buy insurance from exchanges.

But these factors are not likely to be much of a hindrance to the deal-makers. In fact, other private equity firms are also focusing on hospital plays. One prominent example is the Blackstone Group (BX), which operates Vanguard Health Systems. The company has had lots of success converting hospitals to for-profit institutions. Vanguard paid $417 million for the Detroit Medical Center, which is a chain of seven hospitals.

Finally, we may also see the public offering of HCA, which went private in 2006 for $21.3 billion. It would definitely provide a nice pay-day for its private equity backers, including Bain Capital and KKR -- and further fuel deal-making in the hospital sector.