Buy-Out Offer Boosted for Republic Health

Reversing a recent trend of privately held health-care companies going public, a Dallas investor group led by a wealthy former professor is seeking to acquire Republic Health Corp. in a $404-million leveraged buy-out.

The bid by Pesch & Co.--through its REPH Acquisition Corp. unit--to acquire Republic would form the nation’s largest privately held hospital management company.

The buy-out plan, which is contingent on securing financing and requires the approval of both companies’ stockholders, would create a private health-care company with 85 hospitals in 24 states.

Prodded by Republic’s board, a group led by LeRoy A. Pesch, a Republic director and former University of Chicago medical professor, sweetened its bid to acquire the Dallas health-care company this week.

McDonnell Douglas Out

The group offered $18.50 in cash and $1.50 face amount of a subordinated debenture for each of Republic’s 21.1 million shares.

In the process, the investment group lost its major partner, McDonnell Douglas Corp., which abandoned the deal, saying it exceeded the $18.50-a-share price that it and Pesch had agreed to.

The buy-out would come at a time when most nonprofit hospital chains and privately held hospital management companies are under pressure to go public, thus gaining capital to expand in the highly competitive $400-billion-a-year health-care industry.

However, the loss of McDonnell Douglas’ financial muscle raises questions about whether the group can obtain enough funding for a leveraged buy-out, which is effected mostly by heavy borrowing. Ultimately the debt is paid with funds generated by the acquired company’s operations or by the sale of its assets.

Pesch & Co.’s REPH unit was formed by Republic officials Pesch, Chief Executive James E. Buncher and James W. McAtee, executive vice president and chief financial officer.

‘Good Offer’

“If I were a shareholder, I would certainly tender my stock; that’s a good offer,” said Barbara Santry, a health-care analyst for Alex. Brown & Sons in Baltimore.

Stockholder sentiment, however, is not the only test that the Pesch group faces.

Without the backing of McDonnell Douglas, which acquired 13% of Republic’s stock last June, the group may find lenders less willing to support their proposal because Republic is highly leveraged.

The company has $490 million in long-term debt and a debt-to-equity ratio of almost 2.3 to 1.

Analysts estimate that Pesch & Co. will have to borrow about $350 million to consummate the transaction. That would raise Republic’s debt-to-equity ratio to nearly 4 to 1, a figure much higher than the industry average.