In the February 2005
issue:
Beverly Enterprises Is Targeted In A Deal
Worth $2 Billion
A group of investors led by Formation
Capital has taken an interest in acquiring Beverly Enterprises, the
largest skilled nursing company, for $11.50 per share. Beverly’s board has
demurred so far, but can shareholders resist this $2 billion deal?
...
Health Care Services
Long-Term Care dominated the health services segment with the greatest
number of deals and the largest prices announced in the past four weeks.
p4
...
Health Care Technology
Four deals were announced in the health care technology segment with price
tags of over $500 million. The Medical Device sector accounted for 20% of
the month’s deal volume. p14
...
In The Departments
Deal Summaries P5
Additional Transactions P11
Transaction Updates P12
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Read more about
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headlines.
Companies mentioned in this issue:
A
Actavis Group p14
Allina p14
Amedisys p4
American Hospitalists p13
American Retirement Corp. p13
AmSouth Bank p13
Appaloosa Management LP p2
AT&T Corp. p3
B
Banta Corp. p15
Banta Healthcare Group p15
Baptist Health System p13
Bayamon Hospital p13
Bedford County Medical Center p13
Beverly Enterprises p1
Binax p15
C
Calvert Health Partners, LLC p14
Carilion Health System p13
Cedara p14
Centocor p16
Centro Medico p13
Chestnut Hill Healthcare p4
Cipher Pharmaceuticals p14
Commonwealth Assisted Living p13
Community Health Systems p4
Compaq Computer p4
CSL Ltd. p14
Cytyc Corp. p15
D
Danisco A/S p14
Delta Regional Medical Center p13
Dynal Biotech p14
E
Eastman Kodak p14
Edwards Lifesciences p16
Elekta AB p15
ESP Pharma p16
Eyetech p14
F
Fidelity Capital Investors p15
Fidelity Strategic Investments p15
Five Star Quality Care p13
Florida’s National Diabetic Assistance p14
Formation Capital p1
Franklin Mutual Advisors LLC p2
G
Galleria Woods p13
Genencor p14
Gillette p3
GlaxoSmithKline p16
Goldman, Sachs & Co. p14
Guaranty Bank and Trust Co. p13
H
Health Care & Retirement Corp. p2
Hewlett-Packard p4
I
I-Many p15
IMPAC Medical Systems p15
InnoRx p16
Intermountain Health Care p13
Inverness Medical p15
Invitrogen p14
IPC-The Hospitalist p13
IVAX p16
J
Johnson & Johnson p16
JRH Biosciences p14
K
Kendro Laboratory Products p15
King’s Daughters Hospital p4
L
Legg Mason p2
Leigh Hall p13
LifePoint Hospitals p13
Lincare p4
Lotus Laboratories p14
M
Manor Care p2
Mariner Health Care p1
MCI, Inc. p3
Merck & Co. p16
Mercle GmbH p16
Merge Technologies p14
Merrill Lynch & Co. p15
Metropolitan Cardiology Consultants p14
Mission Medical p16
N
National Senior Care p1
Neoforma p15
Northbrook NBV LLC p2
Novation p15
O
Oxbow Equities Corp. p16
P
Peninsula Pharma p16
Pfizer p14
Pinewood Inn p13
Planters Bank and Trust p13
Polfa Kutna p16
PolyMedica Corporation p14
Proctor & Gamble p3
Protein Design Labs p16
Proxima Therapeutics p15
R
Recordati SpA p16
Robert W. Baird & Co. p15
Roche Holdings p16
S
SBC Communications p3
Seacrest Health Care Management p3
Selectica p15
Sigma Micro Informatique p15
Sigma-Aldrich p14
SPX Corp. p15
St. Jude Medical p15
St. Paul Heart Clinic p14
Sunrise Senior Living p13
SurModics p16
T
Terumo Corporation p16
Terumo Medical Corporation p16
The Fountains p13
The Vertical Group p15
Thermo Electron Corp. p15
Trilogy, Inc. p15
Trustmark National Bank p13
Twin Oaks Partners p15
U
Union Planters Bank p13
Universal Health Services p13
University HealthSystem Consortium p15
University of Pennsylvania Health System p4
V
Valeant Pharmaceuticals p16
Varian Medical Systems p15
Velocimed p15
Verizon Communications p3
VHA, Inc. p15
W
Warburg Pincus p15
Winyah Health Care Group p4
Wyeth p16
Wythe County Community Hospital p13
X
Xcel Pharmaceuticals p16 |
The
Health Care M&A Monthly
Beverly Enterprises Is Targeted In A Deal
Worth $2 Billion
For the past two years, the Long-Term
Care sector has consistently posted the highest deal volume in health care
services. Within the sector, however, deals have lopsidedly favored the
assisted and independent living end of the senior care acquisition
spectrum, to the neglect of skilled nursing. True, National Senior Care
made headlines last year by buying Mariner Health Care (OTCBB: MHCA)
for $1.0 billion, but that was largely an exception to the general trend.
The winds of change appear to be shifting
now. After a few significant but expensive sales of skilled nursing
facilities, or SNFs, toward the end of 2004, the country’s largest
operator of SNFs, Beverly Enterprises (NYSE: BEV), has become the
target of a group led by Formation Capital in a deal that could top
$2 billion. The market responded favorably. Within days of this
announcement, BEV’s shares were up 33%, exceeding the preliminary price of
$11.50 per share on the table. And on this news, other nursing facility
stocks jumped as well.
After the initial shock,
we realized that a bid for Beverly should not have been that big a
surprise. Long the subject of many takeover and breakup rumors, BEV’s name
has often surfaced, particularly when its stock price drops. In the late
1980s, it traded below $4.00 per share, provoking rumors of a potential
bankruptcy filing. During the 1990s, the share price mostly stayed out of
single-digit territory. But by 2000 it had dropped to $2.31 before jumping
back up to over $12.00, only to plunge to $1.60 per share in 2002 and then
rise to a high of $9.41 in 2004.
Despite this roller
coaster ride, Beverly was one of only three major publicly traded
long-term care chains that did not file for bankruptcy protection during
the time of troubles from which we have recently emerged. Whenever the
shares plunged, analysts took to their calculators to see what the
"breakup" value was, trying to figure out a reasonable per-bed valuation,
which states should be sold off and how to finance the theoretical
acquisition. But ultimately their calculations were filed away, until now.
The Biggest
Player in Skilled Nursing
Once upon a time, Beverly
had three times the number of facilities as its closest competitor. But
realizing that size was just not enough, the management that built BEV to
more than 1,000 facilities started to downsize. When new management
arrived four years ago, asset sales continued, and with some reasonable
success. At last count, Beverly was down to 369 facilities, all but 18 of
which are SNFs. Some ten years ago, BEV’s market cap was $1.2 billion when
it had 725 facilities (and with a lot more debt than today as well). Now
it finds itself just above that mark as a result of the acquisition talks.
Formation Capital Makes
Its Move
Unlike previous exercises
in number-crunching, the current bid has to be considered a serious one.
The investment group has already purchased more than 8 million shares of
Beverly on the open market, now worth more than $100 million, and they
have also stated they will put up to $375 million of equity into the deal.
The major investors, led by Formation Capital, include Appaloosa
Management LP, Franklin Mutual Advisors LLC and Northbrook
NBV LLC.
The investment group has
offered to pay $11.50 per share, which yields an equity investment of
about $1.25 billion. However, when debt ($570 million) and leases
capitalized at 12% ($258 million) are factored into the equation, the
total (and theoretical) deal value rises to $2.07 billion. In perspective,
that price tag would make this the second largest long-term care deal in
history, coming in second after the $2.9 billion acquisition of Manor
Care in 1998 by the former Health Care & Retirement Corp., now
Manor Care (NYSE: HCR). If Formation Capital’s initial price per share
were hiked to $13.00, the total value would reach $2.2 billion.
BEV’s annualized third
quarter EBITDA is about $185 million, before any adjustments, so at the
lower per-share price, the deal would be valued at just over 11x EBITDA
and $51,800 per bed. Now, no one seriously believes that BEV’s beds are
worth $50,000 a pop, so some part of the value obviously comes from its
hospice and therapy divisions, which are growing and produce significantly
better margins than the SNFs. The Formation Capital group has estimated
the ancillary businesses may be worth $4.00 per share, or more than $400
million, which is about 1.6x estimated 2005 revenues and 6.0x EBITDA.
Admittedly speculative,
this valuation still lies well within the realm of possibility. So if we
remove these ancillary businesses from the valuation, the price does come
down to almost $42,000 per bed, which happens to be the average price paid
in the market from 1996 through 1999. While prices have been a lot lower
since then, our readers will shortly learn that, based on our 2004
statistics due out next month, a significant jump in average prices can be
expected from the dismal results of 2003.
How High Can They Go?
Even so, no one believes a
deal will go through at $11.50 per share, especially since the market has
already taken the shares above $12.00. Despite the investor group’s stated
willingness to sweeten its initial offer, that leaves little room to
maneuver since anything over $13.00 per share begins to get problematic,
especially for any new financial buyers with little experience navigating
the vagaries of reimbursement and liability insurance.
Wringing Out Beverly’s
Untapped Value
With such little wiggle
room, what’s the attraction? One of the main keys to this deal will be the
assumptions made on liability insurance accruals. Legg Mason has
assumed a $45 million annual savings for someone like the Formation
Capital group, which adds $350 million to $450 million in value depending
on what multiple you want to use. There is another key to be turned to
make sense out of this deal, but one that only a few buyers will be able
to recognize, or put to use effectively.
One constant feature in
the criticism of Beverly over the years, particularly when it was double
its current size, is that it makes more sense to break the company up into
two or three smaller operating units in order to get operations— and
margins—under better control. Beverly suffers from relatively low margins
in the industry, some 50% lower than Manor Care’s. And since it is a
truism that health care delivery is a local matter, a more localized
approach to Beverly’s operations could help improve margins and, by the
same token, occupancy.
Combining occupancy
increases with margin expansion can have significant financial
ramifications, as Formation Capital knows firsthand. Three years ago, an
affiliate of Formation Capital purchased 49 skilled nursing and four
assisted living facilities in Florida from BEV for $165 million. Formation
then hired newly formed Seacrest Health Care Management to operate
the facilities while Formation acted as landlord. In just three years, the
occupancy for the portfolio has jumped from 84% to 92.5%, and revenue has
grown from $285 million to just over $400 million. Margins have increased
while deficiencies have declined, and the return on investment has almost
certainly been spectacular (and not public). But it seems more than likely
that the profitability was disclosed to the investors backing Formation’s
current bid, and that may have played no small part in their interest in
participating in the deal.
However, it is difficult
to predict at this point how BEV would be divided up into leaner and more
profitable operating units. The company maintains a large presence in such
difficult states as California, Minnesota and Indiana. Still, a more local
management structure will help to improve operations. So any analysis as
to what the Beverly portfolio is worth has to include some assumptions
about occupancy and margin improvements beyond any cuts in liability
costs. No one outside the Formation Capital group knows what they are
assuming, and for all we know, that is just the gravy (or the cushion) on
top of what their minimum expectations for Beverly are. But if past is
prologue, they will separate real estate ownership from operations, and
let local management teams take over.
Greenmail
Though this saga will play
itself out over the next several months, the jockeying has just begun.
Formation Capital’s first formal letter arrived on Thursday, December 23,
but BEV was closed for a four-day holiday weekend, so management
apparently didn’t see it until Monday the 27. Then during January, in its
second letter, Beverly said they would respond on February 4, knowing full
well that the next day was a deadline to get on the agenda for the
upcoming annual meeting, effectively blocking the investor group from
making their case to shareholders. However, Formation Capital managed to
slot in a letter with six nominees to the board by the deadline. The slate
includes turnaround specialists, restructuring experts and crisis
management gurus. You can imagine how they will view the bid.
Such ploys and
counterploys are common enough in the M&A business, but it will all boil
down to what makes sense for shareholders. They may likely find that
roller coaster rides are best left to amusement parks, approve the stock
valuation in Formation Capital’s bid and back a sale to the highest
bidder. |
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