Steve's Blog on Senior Care

The Bidding For Beverly Enterprises Is Over, With North American Senior Care Remaining On Top

In one of the largest transactions ever in the senior care industry, assuming it does close, Beverly Enterprises will be sold off at $13.00 per share to North American Senior Care (NASC).  The initial “winning bid” of $12.80 per share did not last long, with Formation Capital and its partners offering $12.90 per share, which was upped by NASC to the final $13.00 level on August 24.  By the 26th, Formation formally withdrew from the bidding process, ending speculation of perhaps an even higher bid.

Shareholders can thank Formation for getting the ball rolling by recognizing an undervalued, and under-performing, asset late last year.  We will never know how long it would have taken for Beverly’s shares to reach their current price level without the unsolicited bid kicking things off.  But we do know that when the Formation group made its $12.90 per share offer, they were not given the protection of a substantial break-up fee that NASC received.  In fact, by tacking on an additional $20 million to NASC’s break-up fee, Beverly basically precluded Formation, or any other bidder, from going higher, because it would have meant $40 million (and ultimately $60 million) removed from Beverly’s balance sheet by the time the deal closed (more on this later).  So when NASC made its final $13.00 per share offer, with the enhanced break-up fee, a competing bid of just $13.10 per share would have been the equivalent cost to that buyer of nearly $13.50 per share, a price level no bidder was willing to go to.  And by the way, the extra $20 million in break-up fee was not too coincidentally close in value to the extra 20 cents NASC came up with to secure the deal.  Our guess is that without the break-up fee, the pricing had at least another 20 cents to go, which should cause some shareholders to be a little upset.

One misstatement of fact that bothers us was in Beverly CEO Bill Floyd’s letter to employees announcing the final bid.  In it, he stated that another party would not only have to submit an improved bid, but that they would also have to pay a $40 million termination fee to NASC.  The fact, however, is that Beverly would have to pay that fee, not another bidder, but there would be $40 million less on Beverly’s balance sheet at closing for the bidder, which effectively would increase the price by $40 million.  Admittedly a small point, but why not tell it like it is?

NASC has stated that it will keep Beverly intact and in Fort Smith, but they never said for how long.  These are real estate investors, not investors used to buying operating companies.  Given the amount of equity NASC is putting in ($330 million), not to mention debt financing of $1.325 billion from Wachovia Bank and $550 million in operating loans from CapitalSource, in our opinion it is highly unlikely that the hospice and rehab businesses will not be put up for sale within the first year of closing, if not earlier.  And there is only one reason to keep operations in Arkansas, and not merge them with the Mariner Health and Integrated Health businesses previously purchased, but we will get into that in the September issue of The SeniorCare Investor.

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Visit Beverly’s Web site

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Beverly Announces The Winning Bidder, But It’s Not Over Yet

With great fanfare, Beverly Enterprises’ (BEI) CEO Bill Floyd announced on August 17 the successful conclusion to a five-month long auction process, stating that the winning bidder, North American Senior Care (NASC), “offered the best combination of price, terms and conditions” at $12.80 per share.  Really?  Although Beverly revealed that 24 parties signed confidentiality agreements, and that just 10 of those submitted first round indications of price (which is non-binding), we never found out how many of those 10 were invited to the second round, nor how many ultimately submitted real bids.  It is obvious now that after the second round, Beverly’s board and its advisors did not contact the “losing bidders” to see if they could go higher.  While they may have thought the process was over, for the sake of shareholders, a quick round of calls to see if the other bidders would go over $12.80 per share, a price that many investors thought was too low anyway, would have been the classic “no-brainer.”

But management, and the board, may have had other priorities, including the fact that as part of the NASC bid, Beverly would stay in Fort Smith, Arkansas, with the hope that “key members of BEI management will be a part of the bright future we see for the next phase of the company’s growth and development.”  Whether that future includes Bill Floyd or not, we don’t know, but he wins in any event because of his shares, options and severance agreement if NASC does not invite him to lead the company.  Keeping his job would just be gravy.  In any event, it has been obvious all along that Beverly’s management preferred any buyer who would keep the company intact, and in Arkansas.

Of course, he may not have that option if Formation Capital and its partners have their way.  Two days after the NASC deal was announced, Formation offered an all-cash deal at $12.90 per share, or 10 cents higher than the NASC offer.  The day before this offer was made, investors must have thought something was in the works, as BEI’s stock was bid up to $13.44 per share, just a day after it tumbled by 39 cents after the disappointing NASC offer of $12.80 per share was “accepted” by BEI’s board.  We have to assume that Beverly has gone back to NASC to see if it will at least match the latest Formation offer.  If they won’t match it, Beverly can terminate the NASC deal on August 23, pay NASC a $3.5 million termination fee and start working with Formation.  That outcome is unlikely, however, as NASC will most likely match the new bid, and after August 23 the termination fee goes to $20 million until a $7 million deposit is paid by NASC, and to $60 million once the deposit is made.  If Formation ends up the winner, it can live with losing $3.5 million from Beverly’s coffers, but the higher amounts are problematic, and Beverly’s management knows it. 

Although no one has materialized, there could be a third bidder lurking out there, especially since Beverly’s second quarter results were better than expected, and released after the “final” round bids were due.  And now all the bidders know the price range it will take to win, or at least close to it, and have the updated financial information necessary to sharpen their pencils.  Most people were expecting to see a final deal in the $13 to $14 per share range, and now we are just 10 cents from that. 

From what we hear, industry veterans would not be too happy to see Beverly sold to the same group of investors that bought Integrated Health Services (out of bankruptcy) and Mariner Health Care (last year), fearing that this group of real estate developers and investors (NASC) does not have a long-term stake in the industry’s performance and reputation.  Two years ago, if asked about the possibility of one group of investors controlling the assets of Integrated, Mariner and Beverly, you would have been laughed out of the room.  NASC may just have the last laugh.  But if the price is taken higher, the Formation group wins as well, since they own 8% of the stock, purchased at prices below $9.00 per share.                      

Related links:

Visit Beverly’s Web site

For more articles on the senior care acquisition market, see Index links for The SeniorCare Investor

Get the inside scoop on senior care M&A at The SeniorCare Investor

Database of health care M&A transactions, including senior care acquisitions

At Long Last – A Senior Care IPO

The moment has finally come.  After years of waiting, and suffering through a difficult market for five years with a shrinking number of publicly traded companies, the field is about to expand.  After quietly merging Brookdale Living Communities and Alterra Healthcare earlier this summer in the first step, Fortress Investment Holdings is soon to complete phase two, as the newly renamed Brookdale Senior Living filed its registration statement with the SEC on August 9 for its initial public offering.  The number of new shares to be offered has not been disclosed, but 4.172 million shares will be offered by selling shareholders, something not uncommon with an IPO, but usually frowned upon by underwriters and investors.  You know the age-old question, “If it’s so good for me to get in, why is it good for you to get out?”

As of June 30, 2005, the company operated 81 independent living facilities with 14,619 units, 291 assisted living facilities with 12,342 beds (not units, according to the preliminary prospectus), eight CCRCs with 3,238 units/beds and one skilled nursing facility.  Occupancy at June 30 was 88.1%.  For the quarter ended March 31, 2005, just 13.7% of revenues came from owned facilities, while 85.8% came from leased facilities (the rest was from third party management fees).  So for investors, this is a very different animal than Sunrise Senior Living, which now generates most of its revenues from management contracts, and different from Atria Senior Living, the other talked about potential IPO, which owns most of its facilities.

At this point, it is impossible to determine how the IPO will be priced by the lead underwriters, Goldman, Sachs and Lehman Brothers.  The company has lost money in each of the last two years, and in the pro forma quarter ended March 31, 2005, Brookdale lost $12.3 million.  The EBITDAR margin for this quarter was just 30.7%, pulled down, we suspect, by the Alterra division, which has been recovering from a bankruptcy filing several years ago before its was purchased by Fortress. 

All senior care eyes will be on this IPO to see if the recent sharp increase in unit prices in the seniors housing acquisition market will be reflected in how investors value Brookdale, even though nearly $2 billion of its properties are leased, not owned.  No one will be watching more closely than Atria Senior living, because if Brookdale’s IPO is successful, Atria has got to start putting its SEC filing together.
       
Related links:

Visit Brookdale’s Web site

Visit Fortress Investments’ Web site

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Mixed Signals For Second Quarter Earnings

When Manor Care came out with its pre-release warning about second quarter earnings being lower than previously expected, with decreased occupancy as the primary culprit, investors believed this was an isolated event.  Manor Care’s share price slumped on the news, but as it turned out, a few of the other major skilled nursing companies had their own earnings problems.

Genesis Healthcare started the cascade when it lowered its full-year earnings outlook by almost 10%, causing the shares to drop by 8%.  While the second quarter earnings met consensus estimates, occupancy did drop and reimbursement pressures from Medicaid and Medicare, plus slower turnaround prospects in the rehab division, prompted the dour forecast.  The next day Kindred Healthcare reported normalized second quarter results that were $0.18 lower than consensus estimates.  The culprit was not the SNF division, but five of the company’s LTACs, with lower admissions and non-Medicare revenues than expected.  Investors responded by sending the shares down by almost 15%. 

The surprise came from Beverly Enterprises.  While everyone was hoping for some news, any news, about the sale of the company, management surprised investors with a better than expected second quarter.  Revenues and margins were pretty much up across Beverly’s three business lines, and according to Legg Mason, on a consolidated basis the company reported its highest EBITDA margin in a decade.  Although a bit counter-intuitive, perhaps the performance was better than both Genesis and Kindred because Beverly has the lowest inpatient Medicare census of the three, and did not suffer from fluctuations in a less predictable patient population.  Beverly’s share price did not rise much on the news, however, because the shares are near their auction-induced peak.  But perhaps investors are betting that the better-than-expected earnings will prompt at least one bidder to increase its offer, which may explain today’s jump above $13 per share for the first time this year.

In the assisted living space, Sunrise Senior Living continues to surprise investors, reporting normalized earnings per share for the second quarter that were 40% higher than consensus estimates.  Sunrise’s shares shot up more than 10% to $61.70 per share on the news, but have since dropped slightly below the $60 level.  Sunrise would appear to be “fully valued” at this point in time, but we have said that before.  In addition to some short covering, part of the price rise has to do with the investment market’s current infatuation with seniors housing, which is also driving the recent sharp price increases at the property level.  Although we are not yet at the peak, the bubble is certainly filling with some hot air. 

Related links:

Visit Beverly Enterprises 

For more articles on the senior care acquisition market, see Index links for The SeniorCare Investor

Get the inside scoop on senior care M&A at The SeniorCare Investor 

Database of health care M&A transactions, including senior care acquisitions

Perhaps The Canadians Want To Buy Beverly Enterprises

In the past six weeks, Canadian investors have purchased more than $775 million of senior care assets in the U.S., most of which have been in the assisted/independent living segment.  But perhaps it’s not too late to step into the bidding process for Beverly Enterprises.

The bids in the second, and supposedly final round, were due two weeks ago, but we have not heard a word from the Board of Directors or its advisors.  On August 4, management holds its second quarter earnings conference call, and while we expect there will be many questions about the auction, it is unlikely management will spill many details.  We hear that bidders are expected to firm up their offers in the next few weeks, which may mean tweaking the pricing a bit or completing expensive due diligence that they and their lenders would normally not do without a deal in hand.  Full narrative appraisals on every skilled nursing facility in Beverly’s portfolio were supposed to be available on the auction Web site by last Friday, but it is unclear how much that will help.

The greater likelihood is that Beverly’s advisors are trying to play the bidders off each other in the hopes of getting a higher bid, or they are giving a latecomer more time to firm up its bid, particularly in the due diligence part of it as well as the financing commitment.  There has been no industry news that would cause an existing bidder to raise (or lower) its offer from what was submitted two weeks ago, so we are left to conclude that either a few games are being played or there is a “favorite” that needs more time.  It now appears that we may have to wait until late August to find out the results, and past the date that the original bidder, Formation Capital, would be able to call for an election of a new board. 

We still believe the company will be sold and taken private, but we can’t wait to see the fireworks when the severance agreements are disclosed, especially if existing ones are altered (and you know in what direction).  That would be enough to cause a deal to fall through, as well as the launch of quite a few shareholder lawsuits.  So while there may be increased Canadian interest in the U.S. senior care acquisition market, we don’t think it will be for the Beverly skilled nursing facilities.            

Related links:

Visit Beverly Enterprises

For more articles on the senior care acquisition market, see Index links for The SeniorCare Investor

Get the inside scoop on senior care M&A at The SeniorCare Investor

Database of health care M&A transactions, including senior care acquisitions