The SeniorCare Investor: Carlyle Wins Manor Care Bid

 

Its Size Will Only Be Topped By The Sale Of Holiday

When Manor Care (NYSE: HCR) announced in April that it had hired JPMorgan to look at the company’s "strategic alternatives," the shares shot up in value by 11%, which came on top of a 19% increase in three months and an 18% gain in 2006. Even after acknowledging that the market for high-quality senior care stocks has been strong, especially among the private equity crowd, when Manor Care’s shares topped $65.00, reaching a high of $68.86 at the end of May based on the euphoric speculation that the winning bidder for HCR just had to pay a decent premium to the current price, we thought enough was enough.

Yes, Manor Care is a very good company, with many saying it’s the best in the skilled nursing business, with strong management, good markets, properties mostly built by the company, ownership of nearly 100% of those properties, strong margins, a very high quality mix of revenues (probably 66% for the SNFs and 73% when the other businesses are thrown in)…need we go on? We are sure this is what attracted The Carlyle Group, which has made much smaller bets in the assisted living business with huge returns, into the bidding for Manor Care. The good news, other than for shareholders, is that the bidding did not escalate into the $70.00 to $75.00 per share range that some investors had been predicting (perhaps wishful thinking). The bad news is that any way you look at it, Carlyle surely paid a full price at the top of the market for a company which, dare we say, has little room for improvement.

Carlyle has agreed to pay $67.00 per share for HCR, representing a 2.6% premium over the previous day’s close but a 20% premium to the price just prior to when the company made the strategic alternatives announcement. Shareholders, or should we say speculators, were furious, sending the shares down by $1.19 per share to $64.10 on volume of more than 9.5 million shares. In the three days following the announcement, trading volume totaled close to 21.5 million shares, or about 30% of the shares outstanding. Average daily volume over the past three months has been closer to 1.5 million shares. How do we spell disappointment for investors who bought shares between $64.00 and $69.00 per share? No premium to market and, unlike the case with Genesis HealthCare (NASDAQ: GHCI), little prospect of another bidder trumping Carlyle.