Steve's Blog on Senior Care

The Beverly saga comes to an end (really)

The saga may finally be over, as the December 12 deadline for a higher bid for Beverly Enterprises came and went last Monday with no new offers (surprise, surprise).  The only surprise was Beverly’s failure to issue any kind of an announcement that it was moving forward with the $12.50 per share bid from Fillmore Capital Partners.  The only “notification” was the filing with the SEC last week of a preliminary proxy laying out not only what would happen in the next several weeks, but also the entire auction process, most of which was known, as well as the compensation packages for key executives.

The one tidbit that was revealed in the proxy was that Fillmore’s initial bid, when the North American Senior Care merger was about to collapse at the equity requirement deadline on November 18, was only $12.30 per share.  This was countered by Beverly at $12.85 per share, and over the weekend the compromise was set at the final $12.50 per share level.  All the prices between $12.50 per share and $13.00 per share were deemed to be “fair” to shareholders by Beverly’s outside advisors.  The range in “values” determined by the advisors, using market multiples of EBITDA, EBITDAR and recent transactions, as well as a discounted cash flow analysis, was from a low of $7.30 per share up to $16.31 per share. 

We also learned, as we suspected all along, that the real bidding was between NASC and Formation Capital last summer, with other interested parties either not coming up with a sufficient price, or capital backing, or not putting enough time and due diligence into the process to be considered serious bidders.  But it became apparent that if Formation, or anyone else, were to top the bid by 10 cents a share again last month, it would just be used to go and get a better offer from the group already at the table, with napkin in lap and ready to dine, so why bother.  The only ones who lost out were shareholders, to the tune of $50 million to $60 million.

And speaking of millions, it will indeed be a Merry Christmas for some of Beverly’s key executives, who will be collecting well over $100 million in total compensation upon conclusion of the sale.  And by our calculations, CEO Bill Floyd, when stock options, restricted stock, severance payments, the incentive plan and deferred compensation are all added together, will be taking home just over $40 million (pre-tax, of course).  You can buy a lot of tacos with that amount of money.  But let’s face it, most shareholders will be glad to get out with $12.50 per share and call it a day.  And in his defense, Mr. Floyd’s compensation package was set well before the entire auction process began. 

We have to admit, from a rather sentimental perspective, that it will be a bit weird not to have Beverly around anymore as a public company.  Having tracked the industry for 19 years, and with Beverly always providing fodder for some type of commentary, it just won’t be the same.  Furthermore, we are not quite sure that Fillmore knows what it plans to do with Beverly, other than making a lot of noise about the difficult operating environment in Arkansas (which means, make nice or we move).  We are sure there will be some interesting developments ahead.

Meanwhile, shares of Brookdale Senior Living remain at their lofty level, just shy of the $29.55 per share price reached on December 12.  Isn’t this a great country?

Signing off until 2006.  Have a Merry Christmas, a Happy Hanukkah and a Happy New Year (and anything else I missed)!    

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

Bah-Humbug, says MedPAC

Every year, the Medicare Payment Advisory Commission (MedPAC) makes its recommendations to CMS and Congress for the annual increases in Medicare rates for health care providers, and every year MedPAC has the stingiest recommendations for the skilled nursing industry.  And this year, a few others joined the SNF industry with coal in their stockings. 

The draft recommendations, for the fiscal year beginning in October 2006, include a 0% increase in rates for skilled nursing facilities, LTACs and home health agencies.  The MedPAC commissioners have always had a disdain for the “excessive” reimbursement SNFs receive from Medicare because of an unwillingness to consider the dismal Medicaid reimbursement in most states, which is understandable because it is not a “Medicaid” payment advisory commission.  Still, common sense would dictate at least an acknowledgement that you need Peter to pay Paul, because Paul is broke.  The problem is that Peter will be broke in the not-too-distant future as well.  Bruce Yarwood, president of the American Health Care Association, recently stated that it is “simply incomprehensible that MedPAC does not recognize the need for a normal inflationary adjustment to an industry with the lowest margins in all of health care.”  While I understand his frustration, unfortunately, it is nothing new.  To add insult to injury, MedPAC is forecasting SNF margins to drop from 13.5% in 2004 to 9.0% in 2006, or a 450 basis point decline over two years.  MedPAC only advises, and its recommendations are frequently ignored, and will most likely be ignored later in 2006.  But it is not comforting for an industry that has finally gotten back on its feet to have an antagonist consistently trying to cut one leg off. 

The buyer of Beverly Enterprises should be watching this closely, as the level of Medicare reimbursement will have a significant impact on the price of the real estate and the ability to recapitalize the company in the first year after the acquisition, if that is the plan.  Today is deadline day for another buyer to step in and trump the $12.50 per share revised offer price made by Fillmore Capital Partners.  While a few hours remain for that unknown brave buyer to step in at a higher price, we are certainly not holding our breath, despite the best efforts of management and the board to maximize shareholder value these past few weeks.

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

The Brookdale Bull Market

On the Monday before Thanksgiving, underwriters priced the 11,072,000-share IPO of Brookdale Senior Living at $19.00 per share, which was the top end of the range.  The shares opened at $23.00 per share and hit a peak of $27.15 just after the Thanksgiving weekend.  With more than 65 million shares outstanding, Brookdale, with 81 independent living communities (14,619 units), 291 assisted living facilities (12,342 beds) and seven CCRCs, became the largest publicly traded seniors housing company with a market cap of about $1.7 billion, surpassing Sunrise Senior Living. 

Timing is everything, and the majority shareholder of Brookdale, Fortress Investment Holdings, could not have picked a better time for Brookdale’s IPO debut.  Seniors housing valuations are at an all-time high, investment demand for quality properties greatly exceeds the supply, capital is abundant and the return expectations for investors of any stripe are, as of now, lower than they have been in years.  And the “D” word, as in demographics, was even brought out of the closet, even though the baby boomers won’t help the seniors housing market for at least another 10 years.  So, our hats are off to Fortress.

The rest of the industry may be tipping their hats as well, with what may be called the Brookdale bull market.  Shares of American Retirement Corp. soared by 29% in November, followed by shares of Capital Senior Living, which jumped 26% last month.  The have continued to rise in December, as have shares of Emeritus Assisted Living and Sunrise Senior Living.  Although Tandem Health Care is more of a skilled nursing operator, management at the company must be loving this bull market, with their own IPO on the way.   

Related links:

Visit Brookdale Senior Living

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