For-profit Vanguard Health Systems Inc. said the $417 million purchase price includes money to retire The Detroit Medical Center's outstanding bonds and other long-term debt.
Vanguard also agreed to spend $850 million over the next five years on capital projects including a new Children's Hospital tower.
"We are very excited about entering the Detroit market," Charles N. Martin, Vanguard's chief executive, said in a statement.
The acquisition would fit with Vanguard's focus on hospitals in urban markets with large population concentrations.
"This is a system that has demonstrated for the last several years consistent profitability but has had limited access to additional capital resources to fund growth and capital projects," Phil Roe, Vanguard's chief financial officer, said about Detroit Medical.
"We have access to capital and want to invest capital in a market where we see opportunities to grow and to invest in additional health-care services."Analyst has questions
Hospital industry analyst Sheryl Skolnick of CRT Capital in Stamford, Conn., however, has concerns about the deal, including about the Detroit economy and Vanguard's capital spending commitment.
Metro Detroit's unemployment rate was 15.6 percent in January, while the national rate stood at 9.7 percent.
"It seems to me that Vanguard may have some concessions from the community or seller that we don't yet know about," Skolnick said.
Vanguard, for instance, is seeking approval for a 12-year break on property taxes related to six of Detroit Medical's eight hospitals that are downtown.
Detroit Medical will be owned and operated by a Vanguard subsidiary called VHS Michigan. Its hospitals will continue to operate under the Detroit Medical Center brand and their historic names.
Detroit Medical is Michigan's largest provider of care to the poor, uninsured and underinsured. For 2008, it earned $44.7 million, up from $37.2 million in the previous year.
The health system has been profitable since 2004, but CEO Mike Duggan said that such safety net hospitals face difficulty landing financing at favorable interest rates from Wall Street rating agencies and bond companies to fund new facilities and equipment.
"The nonprofit hospital model is killing health care in the city of Detroit," Duggan said at a news conference Friday.
Vanguard owns and operates 15 acute care hospitals with 4,135 beds in four states. The company had revenues of about $3.2 billion for its last fiscal year that ended June 30, 2009.
The letter of intent will end on June 1 if the parties don't reach a definitive agreement.
Getahn Ward covers the business of health care. He can be reached at 615-526-5968 or at email@example.com.
Moreira on Success: Be Flexible, Willing to Change and Never Stop LearningTax Help: Turn assistance into gift for best tax outcome