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September 26, 2005

A 60-Day Extension, And Beverly Enterprises Is In The Spotlight Again

Oh my, how the world can change in just a few short days, and we aren’t talking about hurricanes. Under terms of its merger agreement with Beverly Enterprises, North American Senior Care (NASC) was supposed to deposit additional funds with Beverly, to bring the total deposit to $60 million, by 5:00 pm last Thursday, September 22. The funds did not show up, with NASC acknowledging that they had not been able to secure their full equity funding, despite having the debt commitments in place. In the days leading to September 22, we had heard some rumblings that the buyer was having difficulty with the equity commitments, securing perhaps only one-half of the amount needed, and that Rubin Schron had withdrawn as an equity participant, but could not verify how solid the information was. We should have more trust in our sources.

We hear that some investor reticence was a result of the bad publicity regarding litigation at Mariner Health over some unpaid bills, as well as issues brought up by Arkansas State Representative Stephen Bright. While we do not know if this is the case, it would seem to be an area of concern. Apparently, Beverly’s management still wants to move ahead with NASC, giving the buyer an additional 60 days to secure its equity funding, and the full $60 million deposit. What did Beverly get in return? Just $3 million, bringing to $10 million on deposit, plus the right to reopen discussions with any other bidders who may offer a “superior proposal,” without having to pay the notorious termination fee to NASC under certain circumstances. The “superior proposal” does not necessarily have to be at $13.00 per share or higher, and could include an offer with more realistic chances of closing in the near term. The $12.90 per share offer with equity and debt commitments in place from Formation Capital comes to mind, but we doubt Beverly CEO Bill Floyd is in a hurry to make that call. But then again, maybe we will be surprised.

All of this may not be good news for investors, who thought they would be receiving $13.00 in cash for their shares by January, or February at the latest. Beverly’s share price has already dropped down to $12.25 per share, so investors (the arbs) are probably discounting the additional time to close from the price, but they also may be anticipating a slightly lower price as well. What happens if NASC can get the additional equity, but only at a lower price per share? What happens if Formation Capital is back in the hunt, but at $12.75 per share, and with the commitments in place today? In that case, the only ones with egg on their face would be Beverly’s board and its advisors, together with a few investor lawsuits. Buyers must spend a lot of time and money on due diligence on the seller and its assets, but in this case the Beverly board and its outside advisors can be faulted for perhaps not doing sufficient due diligence themselves on the buyers, without the necessary knowledge to be in a position to back the horse with the best ability to close, and with the least amount of issues that could be raised about past performance. Of course, hindsight is 20-20, but it is also possible that a little bit of the ABA syndrome, or “Anyone But Arnie,” was involved, at least in the executive suite.

Although unlikely, it is also possible that someone could come in at just over $13.00 per share, now that the $40 million termination fee payable to NASC has been suspended under certain circumstances. Shareholders would like that, especially the one who paid $13.44 per share in August, but the talk around the Street now is the total amount of severance, change-in-control and retention bonuses that will be paid out to the Beverly management team. We had estimated the number to be worth in the range of 50 cents to $1.00 per share (or about $50 million to $100 million), but the current buzz is that it is between $100 million and $150 million, a level that could spell litigation. We don’t know what the real number is, but now that there is some acrimony in Arkansas, people are beginning to wonder just whose interests Beverly’s management is serving.

We thought we were done blogging about the Beverly deal when the $13.00 per share offer was accepted and Formation withdrew. Somehow, we expect more news will fill these pages in the coming weeks.

September 19, 2005

Is Bright’s Last Stand Becoming Beverly’s Bad Dream?

It is amazing how attitudes can change in just six months. Last March, Arkansas state representative John Verkamp submitted House Bill 2593, called the “Long Term Care Resident Protection Act of 2005,” with the stated purpose of providing for the protection, health and well being of residents in long-term care facilities. Companion legislation was also submitted, and both bills included an “Emergency Clause,” claiming that an emergency existed in Arkansas and that immediate passage was necessary. The intent, of course, was to prevent the sale of Beverly Enterprises to Formation Capital, or to any other corporate buyer. But when management finally succumbed to the financial wishes of shareholders, and put the company on the auction block, many state legislators had a sudden change of heart. One, however, seems to have stayed the course and has maintained his interest in patient care.

Republican state representative Stephen Bright, who supported the two bills back in March (and was a co-sponsor), has not been getting a warm and fuzzy feeling from the winning bidder for Beverly, North American Senior Care (NASC). He called for hearings on the transaction last week at the joint meeting of the House and Senate Public Health, Welfare and Labor Committees, but was voted down 17-3, and he was only accorded about 20 seconds of time before he was shut down by the committee chair. All he wants to do, apparently, is ask some questions directed to Beverly and NASC about corporate responsibility, quality of care and the ability (and desire) of NASC to meet its financial obligations. Now is not the time, he has been told, and he has been scolded for trying to queer the deal. He also has become the most sought after state legislator, given the number of calls he has received in the past two weeks, including one from the governor’s office, to cancel his hearings. It would seem that despite shrinking in size from a decade ago, Beverly still carries a lot of weight within the corridors of power in Little Rock.

One question they do not seem to want to answer is, Why would PSS World Medical, a company with a 20-year history with Beverly and that now sells $34 million in medical supplies annually to the company, give notice to cancel its contract with Beverly in 90 days? PSS has stated it is concerned whether NASC would “honor and abide by past practices with regard to trade and credit terms.” In other words, they appear to be worried about getting paid on a timely basis, and as it turns out, PSS World’s subsidiary, Gulf South Medical Supply, is already in litigation with the purchasers of Mariner Health Care, who are also tied in with NASC.

So Representative Bright is fighting a lonely battle, and even joked on a local radio station that he may be found floating in the Arkansas River because of his inquiries. Although two weeks ago we stated that the fat lady has sung, and that this is a done deal, Mr. Bright is planning on another hearing, with subpoena power and in a friendlier committee, on September 20, just a few days before NASC has to go hard with a $60 million deposit. This is his last term in the Arkansas House, so Mr. Bright is not looking for votes. He just wants some answers.

September 12, 2005

A Bright Spot In The Midst Of Katrina’s Darkness

Planning for a disaster is not easy, and most of us give it lip service because the likelihood of a catastrophic event where we live is so low. But after the attacks on September 11, 2001, and the floods of Hurricane Katrina two weeks ago, people may just start to pay more attention to their disaster plans, or create new plans if ones don’t already exist. The city of New Orleans, as well as the state of Louisiana, had disaster plans in place, and apparently had even rehearsed them as recently as 13 months ago, but when Katrina struck, that planning seemed to be ignored, and local officials were left immobilized, and in despair, by an act of nature of a force rarely seen before.

There were others, however, who had a plan, acted on it and got out of town before the storm hit. The residents and their families of Sunrise at Bayou St. John in New Orleans, operated by Sunrise Senior Living, can thank the staff for being prepared and not wasting any time. The company has disaster plans for all its facilities in areas that are prone to violent weather, and in the case of New Orleans, they were lucky they had it. After the last hurricane, the city of New Orleans requested that the facility have a plan in place and filed with the city.

On Saturday, two days before the full force of the storm hit New Orleans, the executive director recommended to the two area managers that the Sunrise facility be evacuated, based on storm updates. They agreed, and the evacuation process began. Another Sunrise facility in Slidell was also evacuated.

The “plan” had several checklists, and that made the process much easier for the staff of the Sunrise facility. The first thing to do was contact the bus company that was under contract with Sunrise in case of just such an event, as well as the hotel, also under contract for an emergency, and located more than 200 miles northwest of New Orleans, where rooms would be available. Then, family members had to be called, many of who lived in the area and were obviously aware of the weather forecast. Of about 85 residents, between 30 and 35 went home with family members over the weekend. But the remaining 50 or more residents had to be taken to safety.

With emergency contacts made during the day on Saturday, the collection of medications and other important documents (all on the checklist) completed, the remaining residents had breakfast on Sunday morning and were out and on the buses before lunch. The local fire department volunteered to help everyone onto the buses, and presumably went back to work to wait for the storm. About 20 staff members, some with their families in tow, joined the residents on the buses, not knowing when they would return to New Orleans, not knowing what they would return to.

As it turns out, some of them had done this once before for another storm, a storm that changed direction after they had evacuated and ended up missing New Orleans. But this time was different, and everyone was thankful they were prepared. I asked the area manager for Sunrise what, if anything, went wrong with the “reality” of the evacuation compared with the “plan.” The answer was, absolutely nothing, other than the severity of the storm and flooding. They have still not had any visual contact with their facility, so they do not know the extent of the damage. But since the city of New Orleans will be “closed” for weeks, if not months, home will have to be somewhere else for a while.

The dark side of this story is why others did not have plans in place, especially in a city that is mostly below sea level and vulnerable to flooding. We all know the sad story of one nursing home in New Orleans located in St. Bernard Parish where more than 30 of the facility’s 60 residents were found dead, many unrecognizable. As one local resident asked, “Why didn’t they evacuate?” Perhaps they didn’t have a plan.

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