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University of Iowa wins bid to acquire Mercy Iowa City hospital

by John R. Fischer, Senior Reporter | November 08, 2023
Business Affairs
Exterior of Mercy Iowa City (Photo courtesy of Mercy Iowa City)
The University of Iowa has won the right to acquire Mercy Iowa City after the original winning bid by the hospital’s bondholder Preston Hollow Community Capital was determined to be not financially viable.

Operating for over 150 years, Mercy Iowa City says its largest senior secured creditor, Preston Hollow, has negatively impacted its operations and led it to declare bankruptcy in August. The firm says that the Mercy board’s actions have placed it “on the verge of insolvency” and that the hospital is in default on its bond agreements, according to Iowa Capital Dispatch.

In the original auction in early October, Preston Hollow’s $29 million offer outbid the University of Iowa’s $28 million. But in the weeks following, a “material disagreement” over who was responsible for the hospital’s operating losses” led to the reopening of the bidding process and Mercy determining that Preston Hollow’s bid was not actually higher or otherwise better than the University of Iowa, reported Iowa City Press-Citizen.

“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,” said the University of Iowa in a statement.

In its own statement, Mercy said that the university will "conduct an in-depth analysis of the healthcare needs of the Iowa City community" before changing any hospital operations and that it will employ “substantially all” Mercy employees. Additionally, it will invest at least $25 million in medical equipment, information technology, and hospital infrastructure.

According to The Gazette, Preston Hollow insisted that all of Mercy’s resources, including revenue from its nonprofit foundation, should go toward paying off its operating losses, which Mercy opposed. In its original bid, it was able to use some of the more than $62 million that Mercy owed it and master trustee Computer Share, meaning that it would not pay the complete $29 million out of its pocket alone.

In the second auction, the company raised its bid to $30 million, but the hospital contended that no bid requiring the use of its remaining cash and Foundation cash was a viable transaction.

Based in Texas, Preston Hollow has invested in Mercy for five years and has been negotiating restructuring it since February 2023. In July, it requested appointing a receiver to control the hospital’s assets, arguing that Mercy was at risk of shutting down. Mercy called this a “pretextual power play” and says its actions stem from the hospital’s refusal to go along with its “aggressive and improper demands to abruptly change management,” reported the Iowa Capital Dispatch.

Both bids will go before a bankruptcy court on November 6 for approval.

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