Capital Senior Living Cancels Hearthstone Acquisition

February 20, 2008

February 20, 2008
We waited to post this entry, probably for too long, because the news that Capital Senior Living terminated its proposed acquisition of the 32 leased assisted living facilities from Hearthstone Senior Services is no longer real news, especially for a blog. Our delay was the result of trying to find the story behind the story, and whether Capital Senior Living management succumbed to the pressure mounted by several large institutional shareholders who thought the acquisition was a big mistake and could even threaten the future solvency of the company itself. Unfortunately, we didn't find any good scoop, and management's explanation that based on the results of subsequent due diligence and lease negotiations the deal was not beneficial to shareholders, may just be what it was and nothing more.

We would like to think that management did not walk away because of the threats from some shareholders, although I am sure the shareholders now believe they have more influence, and will try to use it. But to handcuff management on every major decision seems to be unhealthy, especially since shareholders are not privy to all the confidential information that management is regarding a particular transaction. Everyone seemed to congratulate management for its resolve in making the "tough decision" to walk away, but management isn't stupid, and with nothing to lose (a free peek, if you will), it was worth the time to look at the transaction. And what some people may not realize, they couldn't even get into the buildings before the contract was signed, so they really didn't know exactly what they were buying until after the announcement. Sometimes, you get a much better feel by giving it the old sniff test when you walk through facilities to see if a) you want to run these particular facilities, and b) if these facilities will really mix well with what you have. Our guess is that the answer was no and they didn't think so, especially with the stated lease rates. Perhaps if the base lease rates could have been negotiated downward management might have continued in the process, but it seems there were too many issues that had to work in Capital Senior Living's favor for the acquisition to make sense in the final analysis. 

The shareholders, however, remain a little bitter and may still pressure the board to put the company up for sale. I still think that is a big mistake, because under almost any scenario it is difficult to believe the company won't be worth a lot more in one to two years. Selling in a weak acquisition market with the capital markets getting shakier by the day just does not make sense, and never did.

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