Magellan getting out of mental hospital business

Columbia firm trims downside risk, stake in Charter Behavioral

August 17, 1999|By M. William Salganik | M. William Salganik,SUN STAFF

Columbia-based Magellan Health Services announced a deal yesterday that will complete a complicated process of getting out of the business of running psychiatric hospitals.

Magellan said it is turning over most of its interest in Charter Behavioral Health Systems LLC, which runs 88 hospitals, to Crescent Operating Co. of Fort Worth, Texas. Crescent Operating, a company run by Texas financier Richard Rainwater, and Magellan each own half of Charter. Rainwater is also one of Magellan's largest stockholders.

Magellan will receive no money or stock in exchange for its interest in the financially troubled Charter. When Magellan completes its exit from the hospital business -- the deal is expected to close in 30 days -- it will concentrate on specialty managed care, particularly in mental health, where it supervises care for 65 million people.

"I think they got a -- how do I put this? -- a risk reduction. They got rid of a lot of downside potential," said Robert M. Wasserman, vice president of research for Ryan, Beck Southeast Research Group of Boca Raton, Fla., an analyst who follows Magellan.

"I think it's good news," said another analyst, Premila Peters of KDP Investment Advisors of Montpelier, Vt.

The deal gets Magellan out of about $6 million in annual expenses for the operation of Charter, said J. Kevin Helmintoller, vice president of investor relations. Charter is supposed to pay Magellan fees in exchange for its services, but the hospital operator has not paid the fees for a year, Helmintoller said. Magellan will no longer provide services to Charter.

Peters said the stock market should react positively to the deal, since "most of the market had already written off this whole investment. Nobody, including the Street, thought they could sell it anytime soon and get anything out of it."

Magellan's predecessor company, based in Atlanta, was in the mental health business. In 1995, it bought a controlling interest in Green Spring Health Services, which began as the mental health side of Blue Cross Blue Shield of Maryland. At that time, Green Spring acted as a sort of mental health HMO for 15 million people.

Magellan was hoping to build an "integrated health care system," Helmintoller said, both managing care and running hospitals. "But it became clear to a number of companies that an integrated delivery system was not going to work," he said. With more and more patients getting short-term treatment, mental hospitals had low occupancy, so that part of the business was performing poorly.

Magellan sold the hospital buildings and half of the operating company for $400 million in 1997 to Rainwater-affiliated companies. Crescent Real Estate Equities Co., a real estate investment trust, took over the hospital buildings. Crescent Operating got half of Charter, which operated the hospitals.

Rainwater is chairman of both Crescent entities. As of Magellan's proxy statement to the Securities and Exchange Commission in January, he was also Magellan's largest stockholder, with holdings and options covering 4.4 million shares, or 13.1 percent of the company. His wife, Darla D. Moore, is a member of Magellan's board and chairs its finance committee.

With the cash infusion from the 1997 Crescent deal, Magellan bought two large companies similar to Green Spring, making it the largest mental health managed-care company in the country. It moved to get out of the hospital business altogether, but a deal last year with Crescent, which would have brought Magellan $310 million, was killed because Charter was performing poorly.

Helmintoller said Magellan expected to take a charge of $42 million to $48 million in the fourth quarter to write down Charter-related assets. It had already written off most of its Charter assets and receivables last year, he said.

News of the deal pushed Magellan stock up, while both Crescent entities slipped. Magellan closed at $9.9375 a share, up 62.5 cents. Crescent Real Estate Equities closed at $20.25, down 12.5 cents. Crescent Operating closed at $5.75, down 18.75 cents.

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