Steve's Blog on Senior Care

Instead of Ghost-Busters This Halloween, We May Have Beverly Buyer-Busters

The general media is beginning to make hay about the splitting off of the real estate from the operations in large acquisitions, such as those involving Integrated Health, Mariner Health and now Beverly Enterprises.  But in making hay, they are getting a little help from the legal community, and specifically, those involved in suing nursing home chains in patient liability cases.  We are aware of a campaign to “dig up some dirt” on North American Senior Care (NASC) and spread it around with various media outlets as a means, we assume, to disrupt NASC’s bid for Beverly.  Everyone knows about the vendor dispute and the nonpayment of certain legal fees at Mariner, but no one really knows if that is all there is.  If that’s it, then the smoking gun will stop smoking very soon. 

The reason for the tort attorneys’ interest in these large privatizations, of course, is that they will no longer have the deep pockets of a New York Stock Exchange company to go after once these nursing home giants are sold and split up.  In the case of Mariner, a senior officer of the company testified in court earlier this year that the company was now worth as little as $5 million to $12 million as a result of the asset sales and the separation of the real estate from operations.  This means they can cry poor at the settlement table, something the lawyers do not want to hear.  With 18 days left until NASC has to come up with its equity commitment, there is not much time left for the negative publicity campaign.  But other, squirrelly, things may have happened out in Arkansas that have yet to see the light, and we are not talking about vampires.

Related links:
Visit Beverly Enterprises’ 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

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Sifting Through The Beverly Rumors

As the share price of Beverly Enterprises drifted downward most of last week, hitting a recent low of $11.13 per share during the day on October 20, the rumors were swirling faster than the winds of lower Manhattan in the trading floors of Wall Street.  One investor called, having just heard that Rubin Schron had walked away from the deal as an investing partner.  There was a moment of stunned silence when this investor was told that this little tidbit had been in the market for, let me see now, two to three weeks?  Others also wondered why it seemed to take so long for this piece of information to make the rounds of this particular species of speculators.  Another investor was upset that Formation Capital had not jumped back into the fray, refusing to understand why it made little sense, other than helping the stock price.

Among the things we heard last week included that Leonard Grunstein was out as well as an investor, that the “West Coast pension fund” we had heard about as the equity investor was Weyerhaeuser and that it was putting up the entire $350 million, and that Wachovia Bank was out as the secured lender in the deal.  Investors were also focusing in on the October 21 deadline for North American Senior Care (NASC) to provide Beverly with updated debt financing commitments and a solvency opinion (which it did, but more on that later), but the equity commitment and additional deposit funds were still not required until November 18.  The fading stock price was a natural investor response to the October 21 deadline, but we also hear that convertible bondholders may have been shorting the stock as a hedge. 

Well, one out of three (so far) is not too bad.  Late on October 21 Beverly announced that NASC had provided its solvency letter and debt commitment letters totaling $1.875 billion.  The only change was that Credit Suisse First Boston did replace Wachovia Bank as the secured lender for $1.325 billion (solid source on that one).  We have not heard why, but our guess is that Wachovia was getting cold feet with all the controversy associated with the deal and the extension for the equity commitment, and we know that CSFB had been circling the deal for months in various capacities.  Beverly’s shares finally started to turn around last Friday, and in early trading today (the 24th) the shares are up by more than 4% as investors are getting more convinced the deal is “back on track.”  The last time Beverly traded above $12.00 per share was October 11, but we expect it to break the $12.00 threshold by the end of today or tomorrow, barring some unforeseen news. 

It seems the only thing remaining is for NASC to submit its equity commitment and additional $50 million deposit which is, of course, the missing link in the whole deal.  One little fact that was hardly noticed was that in the original deal the equity was supposed to be $330 million, but was raised to $350 million when the extension was announced, the significance of which, if any, is unclear.  Via the rumor mill, we also heard last week that the “West Coast equity investor” had already talked with Beverly’s advisors and had largely completed its due diligence on the deal.  If that is the case, NASC may be able to fulfill its final contingencies prior to the November 18 deadline, putting all of this to bed once and for all.  But then, state representative Stephen Bright still wants his questions answered.         

Related links:

Visit Beverly Enterprises’ 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

The Price Of Beverly’s Shares Continues To Drop, But There May Be A Reason Why Other Bidders Have Not Stepped In

Two weeks ago we asked, How low will it go?  This was in reference to the share price of Beverly Enterprises sinking down to a post-deal announcement low of $12.10 per share, when the agreed upon price for the acquisition of Beverly by North American Senior Care (NASC) was $13.00 per share.  At the time, we assumed that if the price dropped below $12.00, it would imply some serious reservations among investors on the deal getting done at the original $13.00 per share price.  Last week, the shares closed at $11.75 after hitting a low of $11.62 on October 12th.  The concern is now there.

NASC is trying to raise $350 million of equity to close the deal, and it sounds as if no stone is being left unturned.  The only rumor we have heard is that a pension fund based in the Pacific Northwest may be interested, but we would find it unusual for a pension fund to invest that much money in what has now become a controversial deal.  NASC has been trying to improve its public image, having recently met with the Arkansas governor’s staff, as well as some local legislators, but not, apparently, with state representative Stephen Bright, one of the few people in Arkansas raising some questions.  In addition, NASC and Beverly have placed full-page ads in the local papers to reassure residents and employees, but also alerting them to the fact the Beverly will get sold, whether to NASC or someone else.  Our attempts to contact Senator Mark Pryor have been ignored, but we hear his staff also met with representatives of NASC.

It is apparent that no one is going to jump in and top the $13.00 per share price despite the disappearance of the $40 million break-up fee in the event a “superior offer” materializes before NASC has put down an additional $50 million deposit.  The question remains, however, whether a lower price today with the full equity and bank commitments in hand would constitute a “superior” offer.  At this point, some investors may say yes.  Something about a bird in the hand…

But what incentive does a potential buyer, such as Formation Capital (FC) have in this scenario?  If they come to the Beverly board with a $12.50 per share deal, for example, with all the equity committed and in writing, and the board accepted it if they were getting vibes that NASC would not find its equity commitment for a $13.00 per share deal, all that does is tell NASC it can lower its price, perhaps attracting the necessary equity, and FC and Beverly’s shareholders lose.  NASC remains in the driver’s seat because if Beverly accepts a “superior offer” and terminates the merger agreement, it gets its full $10 million deposit back.  But here is the kicker.  We have heard that if NASC deposits additional funds, but not the full $50 million, before the deadline, and then Beverly accepts a “superior offer,” NASC would get back all of the deposited money, plus reimbursed expenses up to the amount of the additional deposit above the initial $10 million.  This means, in theory, that if NASC “hears” that Beverly is about to accept another offer, it could quickly deposit additional funds knowing that it would get the money back, but also that it would be doubling its money at the same time in terms of the reimbursed expenses.  In other words, if this is correct they can win if they lose. 

We have to assume that the investors in NASC are not in it to simply “get their money back” and break even on the deal at this point.  They want to buy the company and see value in the assets.  But as it stands now, there is little incentive for another buyer to make an offer, superior or not, because the merger agreement is still with NASC and Beverly can’t accept a lower price, even with 100% equity, without NASC countering with a lower price as well.  So the other buyer(s) will have to just sit and wait.  And if you check Beverly’s Yahoo message board, which is typically populated by a bunch of idiots, the recent talk is of a 27% annualized return (excluding holding costs) if you buy now and receive $13.00 per share at the end of February.  If that were a guaranteed return, everyone would be jumping in, and there is a reason why they are not.      

Related links:
Visit Beverly Enterprises’ 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

Health Care REITs Off To Good Start In Fourth Quarter

Just as we were commenting about the high volume of large portfolios that keep on coming to market in our October issue of The SeniorCare Investor, two health care REITs announced significant acquisitions last week.  In the larger of the two, and a portfolio that we knew was on the market for sale but suspected the seller did not want to give up operating control, Nationwide Health Properties (NHP) purchased 13 skilled nursing facilities and one assisted living facility located in Massachusetts and New York.  The purchase price was $171 million, or a hefty $92,000 per bed, which is more than double the average price paid per bed in the nursing home acquisition market last year.  The Northeast is usually the most expensive region in the country, and many of these facilities are relatively new, but the price is high nonetheless.  NHP will be leasing the facilities back to Senior Residential Care and Wingate Healthcare at an initial lease rate of 8.5%, which has to be the lowest ever recorded by NHP, which has preferred to do most of its deals in the 9.0% to 10.5% range.  I guess those days are over, at least for large deals.

In the second transaction, Ventas purchased six retirement communities from a joint venture managed by Capital Senior Living Corporation for $85 million, or $89,500 per unit.  The facilities will be leased back to Capital Senior Living at an initial lease rate of 8.0%, another sign of the new era of single-digit lease rates for REITs.  This will benefit Ventas as it continues to diversify its portfolio from both the skilled nursing industry and its primary tenant, Kindred Healthcare, and Capital Senior Living will post an attractive gain on the sale and add significant top-line growth as it will book total revenues from the communities starting in the fourth quarter instead of the much lower associated management fees.  Next up for the REIT sector should be Health Care Property Investors purchase of 15 assisted living facilities.

So far, there has been no real news on the Beverly Enterprises transaction, but we are waiting.  If you hear of anything, please give us a ring. 
               
Related links:
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

The shares of Beverly Enterprises are sliding in price, and investors are wondering what’s next.

Just when Beverly Enterprises shareholders thought they would be receiving $13.00 per share in the sale of the company, the share price keeps on dropping, hitting a recent low of $12.10 per share in early trading today.  Should the price drop below $12.00 per share, that could indicate some serious investor doubts about closing a sale of the company to North American Senior Care at the agreed upon price of $13.00 per share.  Surprisingly, we have yet to hear of another bidder entering the fray, despite the possibility of a lower price, or at least the $13.00 price with the $40 million termination fee waived.  There could be a little game of cat and mouse being played out, as one could assume that Bill Floyd’s ego would prevent a call to Formation Capital or another bidder, if another one even exists.  And Formation may just be better off waiting on the sidelines as the stock price continues to slide.  After spending three days with the 1,600 movers and shakers in the senior care industry at the annual NIC Conference in the nation’s capital, we were not able to pry loose any new information on the deal, so there may not be any developments out there.  Yet.

Speaking of the NIC Conference, the record attendance is indicative of a hot acquisition and investment market.  Yes, there were many in the crowd worried about acquisition pricing and the record low cap rates, but there were just as many (if not more so) that simply viewed the current strong market as nothing more than a vindication of their hard work and a recognition that the senior housing industry’s time has finally come.  Increasing occupancies, profits, and profit margins – what’s not too like?  And all of this before demographics kick in.  The more cautious among the attendees, especially those who have been in the business for 10 to 15 years or more, recognize a market peak when they see one, but they have no idea when the downward trend will begin.  Perhaps the sign will come with a surge in construction starts and new developers entering the senior housing market.  We’ve been down that road before, and we all know where it leads.

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