Two weeks ago, Mercy Iowa City announced Preston Hollow Community Capital had won the bankruptcy auction for its assets, calling the Dallas-based specialty finance company’s $29 million bid the “highest and otherwise best bid.” All that remained was to finalize the provisions of the sales agreement for Mercy’s 234-bed Iowa City hospital, the Mercy Family Medical Centers in Kalona, Tipton, West Liberty and Williamsburg, as well as other assets, and submit it for approval by the judge overseeing Mercy’s Chapter 11 bankruptcy case. Then last week, Preston Hollow filed a petition with the bankruptcy court saying that it and Mercy were disagreeing over a key term in the sales agreement, asking the judge to require Mercy to submit to Preston Hollow’s definition.
“Mercy is confident in its position and intent of the bidder and had hoped to continue to work in collaboration with Preston Hollow rather than file a motion,” Mercy officials said in a statement at the time. “Mercy’s management and attorneys are working on strategic options for a timely resolution.”
That’s all changed now.
On Friday afternoon, the University of Iowa announced that Mercy has now declared its bid of $28 million in the bankruptcy auction earlier this month the winning bid.
“We are very pleased that the university’s renewed bid has been selected by Mercy Iowa City,” UI President Barbara Wilson and Denise Jamieson, vice president for medical affairs and dean of UI’s Carver College of Medicine, said in a written statement. “This long-time hospital has had a significant impact on our community, and we are gratified that we will be able to honor its 150-year history as an anchor of care in eastern Iowa.”
Mercy and Preston Hollow had been at an impasse over their differing definitions of “operating losses” in the sales agreement that was being negotiated.
As part of its auction bid, Preston Hollow agreed that it and American Healthcare Systems, the California-based for-profit company it proposed hiring to run Mercy as a nonprofit, would agree to cover Mercy’s operating losses between Nov. 30 and the day the sale is finalized, which was expected to happen before the end of February.
Preston Hollow said in its court filing last week that it wanted the court to impose “the amount by which the hospital’s operating expenses exceed its available funds to pay such expenses, including available cash-on-hand” as the definition of “operating losses,” saying that that was the “ordinary meaning” of the term. That meant the firm would be able to access what remains of the millions the Mercy Hospital Foundation — a separate and distinct nonprofit that supports the hospital — has provided to help keep Mercy afloat. Mercy Iowa City has taken the position that those funds cannot be included in cash-on-hand calculations. Preston Hollow asserted in its filing that excluding foundation funds “would have the practical effect of significantly increasing the funding burden to be borne” by the firm.
It was not the first time Mercy and Preston Hollow had a major point of contention in their relationship. Preston Hollow purchased $41.8 million of the bonds Mercy issued in 2018. In July this year, Preston Hollow filed a court petition seeking to force the hospital into receivership, claiming Mercy was in “financial freefall” and is “on the verge of insolvency.”
In the response it filed seeking to have Preston Hollow’s petition dismissed, Mercy called the receivership request a “pretextual power play by an investment fund that puts the medical team, employees, patients and larger community at risk,” that was the result of Mercy rejecting the company’s “aggressive and improper demands to abruptly change management.”
On Aug. 7, Mercy filed for Chapter 11 bankruptcy, which preempted Preston Hollow’s receivership request. That same day, UI had announced it had entered into a purchase agreement with Mercy and would pay $20 million for “substantially all” of Mercy’s assets, and incorporate them into the UIHC system.
The $20 million dollar bid is just 3.3 percent of the amount — $605 million — UI offered in an unsuccessful attempt to buy Mercy in 2021. UI was one of four prospective buyers who entered bids for Mercy that year. Mercy rejected all the bids and canceled the sale. Neither UI nor Mercy has explained what happened over the course of the last two years that led the sales prices being slashed so drastically.
UI’s $20 million bid became the “stalking horse bid” for the bankruptcy auction — the bid all other bidders would have to surpass to win. UI would eventually raise its bid to $28 million, the maximum amount authorized by the Iowa Board of Regents, but Preston Hollow bid $29 million. The firm’s bid was a “debt bid,” using part of the debt Mercy owed the firm in place of money for almost all the amount of its bid.
“Recent events related to the ownership of Mercy Iowa City have unfolded quickly and the bondholder determined its previously selected bid was not financially viable,” Wilson and Jamieson said in their statement on Friday. “Mercy agreed with the bondholder’s conclusion and as a result declared the university’s bid as the winning offer.”
But as with every other announcement in Mercy’s case, Friday’s statement is not the final word.
“Although today’s selection of the university’s bid is a significant step forward, there is still plenty of work to be done,” Wilson and Jamieson said. “The next step is the approval of the selected bid by the bankruptcy court.”
The statement did not include an estimated timeline for when this latest agreement would be submitted for approval.
