When Brookdale Senior Living announced its agreement to buy American Retirement Corporation after the close on Friday, May 12, many investors and analysts thought that the high price, multiple and premium would send the few remaining seniors housing stocks upward as they all could be viewed as takeover candidates (well, almost all). But the only one to really rise, in addition to ACR, was Brookdale itself. Brookdale’s shares jumped by 14% on the first day of post-announcement trading on Monday, followed by another 11% spike on Tuesday.
Usually, the buyer in a large deal sees its shares drop a bit as current shareholders worry about dilution and risk of assimilation. But in this case, with Brookdale’s shares trading at such a high multiple, the deal was presented as accretive even before some of the benefits of the merger are accounted for, such as bringing ACR’s ancillary services know-how into Brookdale’s facilities. In addition, the ACR portfolio enhances the average quality of the Brookdale portfolio, and investors may have perceived that little benefit as well.
But what happened to the other seniors housing stocks? Not much, is the easy answer. The remaining four companies all hit their 52-week highs two and three months ago, and only two of them, Capital Senior Living and Five Star Quality Care, are within 10% of the highs. It certainly didn’t help that the overall market sort of collapsed last week, with almost daily declines in the various indices. But seniors housing stocks often are not impacted the same way that the overall market is, especially since the trading volume is usually quite low in each of the specific stocks.
Even another public letter to the independent directors of Capital Senior Living from one of its largest investors, Mercury Real Estate Advisors, demanding yet again a sale of the company to maximize shareholder value, and using the Brookdale/ACR deal as an example of the acquisition demand, did little to push Capital Senior Living’s price up. The reality is that the seniors housing stocks are for the most part fully priced, with Sunrise Senior Living a question mark because of its recent plunge as a result of some unresolved accounting issues. In other words, there is little room to move up, with Brookdale being the only likely buyer in the market being able to pay up should it want to buy again, but its hands should be tied for a while with the ACR transaction. So for now, Mercury may just have to wait, and investors may have to take a breather to see where the market will go, and whether seniors housing has any steam left after a couple of great years. The “Brookdale effect” will just have to be put on hold for now.
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