WakeMed's bid for Rex pits money, care, pride

Hospitals defend their turf while locked in a delicate takeover dance.

Staff WriterMay 13, 2011 

  • Why does WakeMed want to buy Rex?

    WakeMed leaders say the deal would improve care for patients, save money by eliminating duplication of services, create a stronger combined hospital system, and provide a huge cash infusion for Rex's parent, the UNC Health Care System, the broader UNC system and ultimately the state. Adding Rex would help WakeMed navigate an industry that's rapidly shifting because of federal health reform. For example, the combined hospital system would have more clout with insurers. WakeMed also wants to eliminate the increasingly competitive threat from UNC Health's expansion strategy in Wake County.

    Why aren't Rex and UNC Health interested?

    UNC Health bought Rex in 2000, and wants to use its Raleigh operations to continue expanding and providing more care and services to patients. UNC Health is seeking more affiliations with physicians, community hospitals and other providers as it looks to extend its network of services across the state. And Wake County is one of the largest and fastest-growing medical markets in the state.

    Could a deal still happen?

    WakeMed is trying to convince lawmakers that its offer represents a large amount of money at a time the state desperately needs fresh sources of revenue. State legislators could put pressure on UNC leaders to consider the deal, or even try to pass a bill that would force a sale. But several said Thursday that effort would face opposition.

    Why is WakeMed offering so much money?

    WakeMed has spent months with a team of lawyers, investment bankers, consultants and others to determine its offer price of $750 million. That price is based on a "complex formula" that includes a "significant gain" for the state, said WakeMed CEO Bill Atkinson. He hinted that WakeMed could even raise its bid to get a deal done.

    One factor in determining the price: Rex reported operating profit of $35.8 million for the fiscal year that ended June 30, 2010, up 74 percent from the previous year. Operating revenue rose 11 percent to $571 million.

    How will WakeMed pay for the deal?

    The private, not-for-profit hospital system has $659 million in cash reserves, and about $450 million of debt in the form of tax-free bonds. It would need to seek additional, outside financing - probably by selling more bonds on Wall Street.

    What will it mean for patients and medical care?

    WakeMed contends that patients will see improvements by consolidating its specialties with Rex services. Rex, for example, offers cancer care, while WakeMed doesn't. WakeMed is much stronger in heart services. But critics worry that reducing competition will limit choices and could lead to higher prices. It also could hurt physicians who would have little choice but to accept the combined hospital's terms and rules.

    How does WakeMed expect this deal will help it reduce costs?

    One step will be to eliminate redundant services that both Rex and WakeMed offer. That would also include cutting back on plans for various expansion projects, which have become a major economic engine during the downturn.

    What will it mean for employees?

    WakeMed employs more than 7,000 people, and Rex employs more than 5,000 -- making them two of the largest employers in the Triangle. Atkinson said that while the union could cut costs by creating efficiencies, this area's growing population will continue to fuel more demand for medical care. That's likely to mean additional hiring whether Rex and Wake Med operate together or separately.

    Won't merging Raleigh's two largest hospitals create a monopoly, which could hurt consumers and others?

    The deal could raise red flags among state and federal antitrust regulators. But the Triangle is one of the most competitive health-care markets in the country, with WakeMed in Raleigh, the Duke University Health System in Durham and UNC Health Care System in Chapel Hill. WakeMed officials argue that merging with Rex won't reduce competition.

    Alan M. Wolf

  • Rex Healthcare

    Business: 658-bed health-care system in Raleigh, owned by the UNC Health Care System

    Size: $571 million in operating revenue during last fiscal year

    Employees: more than 5,000

    Top executive: CEO David Strong (UNC Health CEO William L. Roper)

    Specialties: baby deliveries, cancer care, surgeries

    History: Founded in 1894 by John Rex; acquired in April 2000 for $290 million by UNC Health

    WakeMed

    Business: 870-bed private, not-for-profit health-care system in Raleigh

    Size: $916 million in operating revenue during last fiscal year

    Employees: more than 7,000

    Top executive: CEO William K. Atkinson

    Specialties: cardiovascular care, trauma and emergency care, high-risk deliveries and infants, children's hospital

    History: Opened in 1961 as a Wake County-owned facility; converted to private, not-for-profit status in 1997

    The well-known local actor became a WakeMed pitchman after he had extensive heart surgery at the Raleigh hospital last year. Wood is a Raleigh theater icon, mostly through playing Ebenezer Scrooge in Theatre in the Park's "A Christmas Carol" for 35 years.

    WakeMed now features him in television and other advertising. On Thursday evening, he was master of ceremonies for a party to mark the hospital's 50th anniversary.

Editor's note: A front-page story Friday about WakeMed's $750 million offer to buy Rex Healthcare included inaccurate information about the founding of Rex Hospital. It was started in 1894 with money left in the will of John Rex, who died in 1839.

WakeMed celebrated its 50th anniversary Thursday evening with a 1960s-themed party featuring Raleigh actor Ira David Wood III as emcee, music, drinks, food and the unveiling of "Healing Hands," a monument in the courtyard of its flagship Raleigh campus.

Earlier in the day, leaders at Wake County's largest hospital system announced the biggest and boldest strategic bet in its long history: a $750 million hostile bid to buy cross-town rival Rex Healthcare.

WakeMed contends that buying Rex from the UNC Health Care System would improve patient care in Wake County and beyond, reduce costs by eliminating redundant services, and provide a much-needed cash infusion for the parent UNC system and the state. Wake Med is also trying to defend its home turf from what it has said are "predatory" expansion tactics by UNC Health using taxpayer money.

But a deal, which would reshape the Triangle's healthcare market, faces many obstacles.

UNC and Rex officials aren't interested in a sale. A deal could raise red flags among antitrust regulators worried that less competition in the local hospital industry could lead to higher prices and fewer choices.

While WakeMed has been seeking support for the acquisition from Gov. Bev Perdue and state lawmakers, several legislators said Thursday that selling Rex won't solve the state's longer-term financial problems.

Senate leader Phil Berger said he has not looked at all the implications, but "it's something we need to be very careful about."

"There are a number of folks in the Senate who think it's a bad idea," said the Eden Republican. Berger said he thinks that any deal would need legislative approval.

As with most states, North Carolina is facing a massive budget hole and lawmakers are eager for possible solutions. Legislators could put pressure on UNC to do a deal by threatening its state funding, or even pass a bill that forces a sale.

"WakeMed is playing on the weakness of the state's finances," said Doug Townsend, a Durham consultant who previously ran an investment bank that specialized in health-care deals. "It's all going to come down to allocation of resources. If the state believes it can use that money to fill a hole somewhere, then the strategy of UNC Health could become a secondary concern."

Last week, WakeMed's board unanimously approved making an offer for Rex. Officials have been working for months with a team of investment bankers, lawyers, consultants and lobbyists. The effort is tied to a broader effort by WakeMed to attack UNC Health's expansion plans in Wake County, especially its recent affiliations with key physician groups.

Last winter, WakeMed started a lobbying and public-relations campaign, and made a formal request seeking records such as UNC's correspondence with Wake County doctors.

WakeMed leaders made their Rex offer official by delivering a letter to Tom Ross, the UNC president, Thursday morning.

In a prepared statement, Ross said the UNC Health board will meet Monday and plans to "consider the offer carefully and conduct extensive due diligence" to fulfill its financial responsibility to the people of North Carolina. But he also said that Rex is an important part of UNC Health's mission of providing high-quality medical care to all state residents, conducting cutting-edge research and educating the next generation of physicians.

"In this uncertain health-care environment, it is critically important that we maintain a long-term vision for the UNC Health Care System that extends beyond the current budget crisis," he said. "I do not believe that divesting UNC Health Care of Rex in order to generate one-time revenue for the state is in the long-term best interests of the people of North Carolina, and it would damage our ability to fully carry out our mission."

At a news conference Thursday morning at WakeMed's main campus in Raleigh, CEO Bill Atkinson said it would be a mistake for anyone to dismiss a legitimate offer.

"I hope it will receive serious consideration from UNC officials and lawmakers," he said. "Consolidation is happening across the entire health-care industry. It makes logical sense for us to go down this path. ... This is a bold idea in tough economic times."

WakeMed would use some of its $659 million in cash reserves to pay for the acquisition, but would also need to seek additional, outside financing. That would likely involve selling tax-free bonds on Wall Street.

Atkinson hinted in an interview that WakeMed might consider raising its offer, which is already worth more than $900 million with Rex's $158 million of debt included.

"I'm not going to bid up my own offer, but we do not anticipate a problem in putting this transaction together," he said.

WakeMed also is willing to walk away if the deal is rejected. "If they say 'no,' so be it," Atkinson said. "But it's worth asking tough questions. We see no harm in having this discussion."

The unsolicited offer could attract rivals from outside the Triangle who want a foothold in Wake County's medical market.

"There are probably a number of bidders who would love to have the Rex franchise," said Townsend, the Durham consultant.

Novant Health, a Winston-Salem hospital chain that has been trying to expand in Wake County for several years, is one potential bidder mentioned by health industry observers.

"If UNC put Rex up for sale, we of course would consider the opportunity," Novant spokeswoman Kati Everett said. "Rex is a quality organization, but it is also currently not for sale."

If a bidding war erupts, UNC officials and state lawmakers may decide a sale is the best option.

But during a separate press conference at Rex's main Raleigh campus, Rex chairman Dale Jenkins said the hospital's board was perplexed by WakeMed's bid, which he described as hostile.

"Rex is not for sale," he said.

Jenkins said during discussions that Rex and WakeMed have had during the past year about possible partnerships, such an offer was never broached. Orage Quarles III, publisher of The News & Observer, serves on Rex's board.

This isn't the first time executives at Rex and WakeMed have discussed a possible union. In the late 1990s, Wake Med wanted to buy Rex, but Rex opted to accept a buyout offer from UNC Health, which paid about $290 million, including the assumption of Rex's debt.

Staff writers David Bracken, Lynn Bonner and Craig Jarvis contributed to this report.

alan.wolf@newsobserver.com or 919-829-4572

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