Nu-Med Selling Acute-Care Hospitals to Cut Debt

In the mid-1980s, Nu-Med Inc. in Encino went on an acquisition binge that transformed it from a small hospital-billing review firm into a company that operated a chain of 16 acute-care hospitals. Nu-Med also expanded into psychiatric hospitals and other medical services, such as nursing care.

But last week, Nu-Med continued to try and shrink the number of hospitals it operates, in hopes of shrinking its problems.

At present, Nu-Med owns six acute-care hospitals and leases two others. But Nu-Med has agreed to sell four of them, including Nu-Med Regional Medical Center in Canoga Park, to a new company that will be owned mostly by the new company’s employee stock ownership plan. Nu-Med would get $122 million in cash and $88 million in debt and preferred stock.

That would drop the number of acute-care hospitals Nu-Med owns to two: Sherman Oaks Community Hospital in Sherman Oaks, and Terrace Plaza Medical Center in Baldwin Park.

The idea behind the sale is simple. “We’re trying to reduce debt,” said Nu-Med Chairman Maurice Lewitt.

Long-Term Debt

The sale would go far toward cutting Nu-Med’s long-term debt, which was about $300 million as of Oct. 31. That is 11 times the amount of Nu-Med’s net worth, which is the difference between total assets and total liabilities.

Nu-Med is hobbling under such a huge debt because it borrowed money to finance its go-go expansion years. Although Nu-Med refinanced part of its long-term debt in 1987, the sizable interest payments on that debt contributed to Nu-Med’s $13.9-million loss on sales of $440.8 million in the fiscal year that ended last April 30.

The sale will also trim Nu-Med’s annual sales to about $250 million.

Nu-Med is not the only health-care company that borrowed heavily to expand earlier in the decade. Many hospital chains did, pushing their debt burdens sharply higher. But by at least one measure, Nu-Med’s debt is exceedingly high by industry standards.

Nu-Med’s $300 million in long-term debt represents 75 cents for each dollar of sales. By comparison, Humana Inc., a Louisville, Ky.-based hospital chain, has long-term debt equaling 36 cents per dollar in sales. Beverly Enterprises in Pasadena, a struggling nursing-home operator, has debt equal to about 50 cents per sales dollar.

Besides cutting debt, the proposed divestitures would have another major effect at Nu-Med: They would leave the company focused mainly on psychiatric hospitals, which Lewitt has said can be operated at a relatively lower cost than acute-care facilities. That could lead to fatter profit margins.

The new company that is buying Nu-Med’s hospitals will, in effect, purchase the hospitals in a leveraged buyout. It will use the hospitals as collateral to borrow the money for the deal. The new company will have as its chairman Stuart J. Marylander, who will remain Nu-Med’s vice chairman; its president will be William N. Hartauer, Nu-Med’s head of investor relations and a former Nu-Med president.

Last week in a separate transaction, the new company also said it plans to buy Medical Properties Inc., an Encino real estate investment trust that owns two acute-care hospitals, including Medical Center of La Mirada. The two hospitals are operated by Nu-Med under a lease.

That deal calls for Medical Properties’ stockholders to receive $9.66 a share, or a total of $22.9 million. Medical Properties was formed by Nu-Med in 1986 but is operated as a separate company.