The SeniorCare Investor: Going, Going .... Gone? Sizzling Summer Sales

In the senior care sector, this is not a good time to be heading to the beach for summer vacation. Too much is going on in the acquisition market, and the situation is quite fluid in several transactions, with the outcome, and price, of a few still up in the air. Existing bankruptcies will dominate the news, but there is also a steady calendar of individual facility sales scheduled for each of the next several months.

The saga of Integrated Health Services (OTCBB: IHSVQ) may be coming to an end, but the only one smiling may be ABE Briarwood Corporation (Briarwood), the buyer. The original bid was in excess of $100 million for the remaining leaseholds and about 30 skilled facilities that are owned free and clear, but we hear that the price is declining because the agreement calls for the final price to be based on a fixed multiple of EBITDA. Because of lower Medicare reimbursements this year, combined with rising costs, sources inform us that EBITDA is falling and that the purchaser will have a much smaller investment than anticipated.

It is doubtful, however, that it will impact the lease rates that Trans Healthcare, Inc. (THI), the ultimate operator, will end up paying. And, to make matters more lucrative for the buyer, Briarwood may refinance the unencumbered facilities, preferably on a non-recourse basis, and end up with little or no money in the deal. This may work to its advantage, because no one is sure what the full patient care liabilities will end up being, and if Briarwood gets all or most of its money out within a year of closing on the deal, throwing the company back into bankruptcy will not be too painful, if it comes to that. The sale is supposed to close in the next several weeks, and our guess is that the cumulative professional fees will be greater than what creditors will get out of the deal.

We should find out what will eventually happen to Alterra Healthcare (OTCBB: ATHCQ) during the next several weeks, too. The company has been shedding assets for the past year, one of the reasons why average prices in the assisted living market declined so much last year, but there is also the option of selling the entire company. In pursuit of this strategy, initial bids were due on June 23, and then on July 17 qualified bidders will have a chance to propose their "exit financing transaction" to the bankruptcy court. The company is being represented by Cohen & Steers, and the rumored asking price is between $50 and $60 million, plus the assumption of debt and leaseholds.

Even though Alterra management made significant progress in cleaning up its balance sheet before (and after) the bankruptcy filing earlier this year, the deal is still quite complicated for any buyer. The biggest problem, however, is that there is a dearth of buyers who either would want the entire company or would have the financial wherewithal to take it on (or both). Although we have heard that there may be three to four potential bidders, the only names that have been mentioned as possibilities are Fortress Investment Group and Emeritus Assisted Living (AMEX: ESC).

For a variety of reasons, Fortress does not seem to be a likely candidate, and its Brookdale portfolio is quite different from that of Alterra. It has been thought that Emeritus, however, and its CEO, Dan Baty, have had their eye on Alterra ever since team Baty/Colson got involved with the company three years ago as investors in a financial restructuring. Bill Colson, CEO of Holiday Retirement Corporation, resigned his Emeritus board position to take a spot on Alterra’s board, and as far back as our May 2000 issue we speculated that Emeritus may have wanted to eventually take part or all of Alterra, or else possibly fold Emeritus into Alterra. With the Baty/Colson investment presumably written down to zero since the bankruptcy filing, Mr. Baty will be starting with a clean slate.

Although we do not know if there is any connection to the current speculation regarding an acquisition of Alterra, in early June Emeritus announced that it entered into an agreement with the holders of $25 million (face value) of convertible preferred stock, with accrued and unpaid dividends of $9 million, to repurchase the stock, including the unpaid dividends, for a total price of $20 million, for a gain of $14 million. The mandatory redemption was coming up in October 2004, but it is unclear why the investor, Saratoga Partners, would take that much of a haircut a year before it had to. The investment was underwater almost from the beginning, and the conversion price of $22 per share has not been seen since, well …ever (the all-time high for Emeritus was $21.75 per share). Saratoga refused to comment, and Emeritus has not returned a call in nearly five years (we’re beginning to develop a complex).

Our guess is that Saratoga wanted to take the money (whatever they could get) and run, having lost patience with promises of better things to come, and that Emeritus wanted to get the preferred stock monkey off its back, especially with the mandatory redemption looming, something at which any future lender would look with wary eyes. So if Emeritus is, in fact, bidding on Alterra, ESC may now have more financial flexibility to consummate a deal, and deal-making is what Mr. Baty likes to do. While the combined companies would certainly save on overhead costs, it is questionable whether Emeritus would be in any better position to operate the Alterra facilities than Alterra itself. And even though Emeritus wants to replace the management contract for 12 Regent Assisted Living facilities that was terminated July 1, taking on Alterra is a tall order. Some answers may be forthcoming next month.

In another bankruptcy situation, it appears that the main creditors of Centennial HealthcareWachovia Bank and Bank of America—have decided to try to sell the company. A selling memorandum is making its way around the market, with restructuring agent Conway, Del Genio, Gries & Co., LLC trying to find a buyer. Centennial operates about 65 nursing facilities, of which 20 are owned and the rest are leased or managed. We do not know what the asking price is, if any, but the company had at least $250 million of debt on the books prior to the bankruptcy filing. A discount is expected, but how much of one is not yet clear.