The SeniorCare Investor: Broken Deals, Complex Deals And Little Deals

Even though the merger and acquisition market has appeared to be relatively slow, senior care led all health care services sectors in the fourth quarter of 2002 with 20 publicly announced deals. It was the second time during the year that senior care led the pack in quarterly volume, the other being the second quarter (also with 20 transactions). But this deal volume pales compared with such "technology" sectors as pharmaceuticals (59 deals in the fourth quarter), medical devices (46) and biotech (28). The dollar value of senior care deals in the fourth quarter was nearly $620 million, or just 5.1% of the total funds spent in the health care merger and acquisition market. For the full year, the number of publicly announced senior care transactions jumped by more than 15% to 67, but there were many private transactions as well.

As the saying goes, "it ain’t over ’til the fat lady sings," and she is just warming up. Last December, Trans Healthcare (THI) entered into an agreement to purchase the remaining nursing home assets of Integrated Health Services (OTCBB: IHSVQ) for approximately $97.5 million, a deal that needed final approval from the bankruptcy court and that was expected to close at the end of this quarter. We assumed that the approval would be a formality, but that "formality" included an auction held on January 22. When THI showed up, another bidder, with no senior care background, also appeared, but with a cash bid of $114 million. This was actually $10 million more than what was necessary to beat out THI, because THI had negotiated a break-up fee of approximately $6 million, so a new bidder would have had to come in just above $104 million.

The new buyer is going by the name Abe Briarwood Corp., but it is backed financially by Cammeby International Limited, a privately held real estate holding company. This group was actively looking at Integrated’s nursing facilities several months ago, but most people thought they dropped out of the race. Their offer is attractive from the court’s perspective because they have no contingencies and they are assuming all post-petition liabilities. This includes Medicare and Medicaid billing discrepancies, but more importantly, liability claims since the bankruptcy filing. The Cammeby people may be smart real estate investors, but looking at Integrated’s assets as a real estate play is a road others have gone down and quickly lost their way (Apollo’s disastrous investment in Grancare/Living Centers of America comes to mind). We have heard that one option may be to throw the assets into bankruptcy again after a sale to remove many of the post-petition liabilities, but a bankruptcy judge is not going to look too favorably on that plan.

With the amount of time that THI has put into the deal, it is unlikely that it will give up, despite being able to collect that $6 million break-up fee. A complaint regarding the new bid was filed with the bankruptcy court at the end of January, and we hear that Cammeby is in search of financing. They will also need an operator, and it is likely they will approach THI to manage the facilities. Although it could be risk-free business for THI (other than liability risks), tripling the size of its operations without having control over the assets entails its own level of risk. This story is far from over, and in the weeks ahead more surprises may be in store.

In other nursing facility acquisition news, Genesis Health Ventures (NASDAQ: GHVI) has entered into an agreement with Formation Capital, LLC to sell nine owned nursing homes (1,341 beds), along with a leased nursing home (138 beds) and assisted living facility (40 beds) on one campus for $26.8 million. The facilities are in Florida, and GHVI joins a growing group of providers that are exiting the state because of the out-of-control liability environment. The 10 nursing facilities are close to 90% occupied and have annualized revenues and EBITDA (based on the fourth quarter) of $94 million and $2.8 million, respectively. The private pay and Medicare census combined is approximately 35%. The buyer will probably hire the Genesis regional management team to operate the facilities, which would cut their start-up costs for the deal, and financing may be provided by GE Healthcare Capital Finance.

At a price of about $20,000 per bed for the owned facilities and a price to revenue multiple of just over 0.3x, the deal looks relatively cheap for the buyer, although we do not know what assumptions are in the numbers for liability insurance. Formation has some recent experience in taking over Florida facilities, as it partnered with a group to buy Beverly Enterprises’ (NYSE: BEV) Florida nursing homes late in 2001, and those properties are performing better than expected.
In a separate transaction, GHVI also announced entering into an agreement to sell four Florida assisted living facilities to Proformance Senior Living Management, LLC for $8.5 million, or just over $28,300 per bed. Separately, effective February 1, GHVI sold eight of its nine Illinois nursing homes for $25.4 million, or approximately $30,000 per bed, to Rothner Health Ventures. The ninth facility will be sold separately in a deal that is expected to close later this month.

Genesis has announced that sometime in the next 60 days the company will conclude its evaluation of a potential sale or spin-off of the remaining senior care assets. A sale in this market does not seem imminent, and one of the most likely suitors, Dan Strauss, is now preoccupied with his nursing facilities leased to Sun Healthcare (OTCBB: SUHG). He apparently had the highest indication of interest for GHVI’s senior care assets, but it looks as if he is concentrating on eventually taking over the Sun properties he owns as a result of buying a portfolio of leased assets from the former Meditrust. Rumor has it that Sun did not pay January rent to Care One, a Strauss-owned company. When Sun emerged from bankruptcy protection last April, it made it very clear that if Medicare rates were cut at the end of September (and they were), the company would very likely have to file for bankruptcy protection again. Unfortunately, it will be a Chapter 7 liquidation this time around, and that is looking very possible.

Speaking of bankrupt portfolios, the winning bidder for the five Connecticut nursing facilities formerly managed by defunct Olympus Healthcare will now be announced in mid-February, not at the end of January as originally planned. The bids were due on January 23, but the five separate bids that came in were so disparate that the receiver needs time to sort out the differences. These are some difficult assets, to say the least, and it may take more than a week or two to nail down a deal.