The SeniorCare Investor: Advocat Spurns Takeover Offer

The Board Turns Away Unsolicited Bid At A 100% Premium
 

There are times when it just doesn’t pay to be a public company.  If you are small, can’t or don’t use your shares as acquisition currency, or have difficulty growing in any meaningful way, it is annoying to have shareholders who may see the world differently.  It is especially annoying if every few years a small group decides they want to take action to change the direction of the company.  Such has been the case with Advocat (NASDAQ: AVCA), a small operator of 47 skilled nursing facilities with 5,445 beds based in Brentwood, Tennessee.

Several years ago there was a group of seniors housing operators in the Southeast who thought that merging their properties into Advocat made sense for both sides under the theory that a larger platform and all the economies of scale that would come with it would benefit them and Advocat’s shareholders.  We seem to remember some dispute regarding value allocation, which is normal since everyone thinks their properties are worth more than the other guy’s and no one wants to come out on the short end.  The proposals fell on deaf ears and the “talks,” such as they were, never went anywhere.  Then in April of 2009, Bristol Investment Fund, which at the time controlled 6.94% of Advocat’s common shares, filed a preliminary proxy statement with the SEC in connection with its nomination of two independent directors to the board at the upcoming annual shareholders’ meeting.  At the time, AVCA’s share price was about $2.85 per share.  Bristol wanted its two directors on the board because they thought shareholder interests would be best served by selling or merging the company with another entity.  They also believed that management had become entrenched and that compensation reform and improved governance were needed.  Nothing came of this attempt, but two years later the senior management was changed, perhaps having nothing to do with Bristol.

Since that episode, the share price has bumped around between $2.41 and $8.94 per share, hitting a high of $5.81 in 2010 and $6.69 in 2011.  During the first four months of this year, however, the price was usually trading between $3.50 and $4.50 per share.  That is, until Covington Investments, LLC made public on May 11 its proposal to buy all the shares of Advocat for $8.50 per share.  Apparently, Georgia-based Covington sent proposals to Advocat in February, March and April of this year, with the February “initial indication of interest” at $7.50 per share; Advocat’s Board indicated that such a price was not sufficient to warrant discussions. 

Because of that response, Covington believed that an increase to $8.50 per share would be “sufficient” to get the process going.  It would appear that because of a lack of cooperation, which is typical in these unsolicited offers, Covington decided it had no choice but to take its offer directly to shareholders, which resulted in the May 11 offer of $8.50 per share, or a nearly 100% premium to the pre-announcement share price.  That offer puts an equity value on the company of about $51 million, or $44 million excluding the AVCA shares Covington had already purchased in the open market.  The news of the offer sent the shares soaring by 74% to $7.54 per share on May 11, but with no interest from management yet again, the price has slowly drifted downward.............Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today