As the market now knows, a newly
created entity called North American Senior Care (NASC) ended
months of speculation with a "final" $13.00 per share offer for Beverly
Enterprises (NYSE: BEV) which, combined with the debt outstanding and
the "assumable" cash on hand, comes to a transaction value of $1.9 to $2.0
billion. NASC is funding the acquisition with $330 million of equity,
$1.325 billion in debt financing from Wachovia Bank (which we
assume is secured by the real estate assets) and $550 million in operating
loans from CapitalSource Financing, which is most likely for
working capital and the value of the ancillary businesses. This financing
totals $2.2 billion, so all of it may not be drawn down, depending on how
much cash is left and NASC’s working capital requirements.
Some investors were surprised at the
less than aggressive bidding for Beverly, with the initial winning bid by
NASC coming in at just $12.80 per share, not much more than the market
price, before Formation Capital upped the ante a bit. In fact,
somewhat incredibly, at least one investor paid $13.44 per share for
Beverly in the open market after the bids came in, when the rumor mill had
it that there was perhaps at least 50 cents to $1.00 per share left on the
table for NASC, Formation or some other bidder to try to come out on top.
But one investment banker, not involved in the deal, said before the bids
came in that he would not be surprised to see the bids come in below
$13.00 per share, because "there is no reason the bidders have to bail out
the investors who bought the stock at $12.50 per share or more." And right
he was.
One of the unfortunate things about
the world of large mergers and acquisitions, especially when it involves
publicly traded companies, is the so-called break-up fee. With NASC’s
initial bid, the break-up fees increased from $3.5 million to $20.0
million to $40.0 million based on certain events. When Formation Capital
topped NASC’s bid by 10 cents per share, NASC had until August 23 to
respond with a higher bid, and technically Beverly could not have entered
into negotiations with Formation until that date. But what upset
shareholders, and we assume Formation and its partners, was that Beverly
agreed to an enhanced break-up fee of $40.0 million (increasing to $60
million) when NASC topped Formation by 10 cents per share, knowing full
well that at those levels, it would be difficult for any other buyer to
keep the bidding process going. The true cost of going higher included a
"penalty" of at least 40 cents per share, because any break-up fee to be
paid would come from Beverly’s balance sheet (and not technically from the
bidder, as per CEO Bill Floyd’s letter to employees), and all buyers were
including the use of the more than $200 million of cash on Beverly’s
balance sheet when calculating their bids. Or were they?
What some investors, in trying to
determine what Beverly was "worth," had factored in was the more than $200
million in cash on the balance sheet. But what they may not have figured
in, especially that poor soul who paid $13.44 per share in late August,
was the size of "change-in-control" and severance payments that will be
paid out to executives, with Bill Floyd presumably the largest recipient.
The bidders had to know the amount as part of the due diligence process,
but our guess is that they will total somewhere between 50 cents and $1.00
per share in value. And that is money investors thought was due to them
(the missing link, so to speak), keeping the bidding below the $13.00 to
$14.00 per share range that many had expected. The details will come out
in the proxy statements sent to shareholders, but by then no one will
really care.
So, assuming that nothing else
happens, what will NASC do? The Wachovia debt that is being put on the
books totals $49,000 per owned bed, a level that is higher than any
average price paid per bed in the history of the nursing home acquisition
market (the record was last year, at $44,600 per bed). Even though Beverly
has divested a lot of its less desirable nursing facilities, the remaining
facilities are still considered to be somewhat average, with a 70%
Medicaid and nearly 14% Medicare census. When the CapitalSource debt is
added into the mix, the debt per owned bed rises to $69,000 per bed, even
though this part of the debt is not related to the owned facilities.
The only name that has surfaced with
NASC is Leonard Grunstein, who we assume is related to one Harry Grunstein,
who is involved with the old Mariner Health and its related newly
named entities. Leonard is also in partnership with Ruben Schron, the
mastermind behind the purchases of Integrated Health and Mariner
Health. The only way to make these deals work, especially when the amount
of debt for a company triples, is to cut costs and sell assets. This is
what happened at both Integrated and Mariner, and at the latter company we
hear that the buyer raised $150 million by selling the LTAC division
earlier this summer, and that overhead as a percent of revenues has
dropped by 20%. And we have heard some rumors regarding lack of payments
promised to certain Mariner executives. As far as Integrated Health is
concerned, we hear that what little staff is left is working at Trans
Healthcare Inc., which is managing a portion of the former Integrated
Health nursing facilities.
We recently received an amusing
e-mail from a Beverly executive accusing us (me) of having a "lust to
close Beverly’s doors and layoff all the hardworking men and women at the
corporate office." Unfortunately for the Beverly employee, life is not so
boring for us that "lust" comes to mind when thinking about Beverly, or
its corporate staff. This naïve executive believes that NASC will be
leaving everything as is at Beverly, a prospect that seems unlikely with
up to $1.875 billion of debt on the books. If history repeats itself, jobs
will be lost and assets will be sold, because that is how the game is
played, like it or not.
But a new twist has entered into the
scene. Apparently, U.S. Senator Mark Pryor (D.-Ark) has asked the federal
office of the Inspector General to determine if Beverly’s Corporate
Integrity Agreement, crafted in 2000 after BEV entered into a plea
agreement with the federal government and agreed to pay $170 million,
transfers to the new buyer. And a state representative is asking for
hearings to ensure that NASC will be a responsible care provider to the
elderly of Arkansas. Our guess is that these are political responses to
look good for their constituents and will amount to little more than extra
legal fees, but you never know.
The Beverly buyers are basically real
estate investors, and after they have taken most or all of their invested
equity out of the deal, through asset sales and refinancings, our guess is
that they will have two potential exit strategies. One would be to throw
all of the real estate assets still owned into a REIT, and find an
investment bank to take it public. This could include the re-sale of some
of the Mariner and Integrated Health facilities as well. The other would
be to merge the operations of Integrated, Mariner and Beverly into one
operating company, presumably with few owned assets, and take that public.
While it could be a logistical nightmare, and result in a company with no
real geographic focus or strategy other than size, the trend has been away
from real estate ownership and toward the operating company model. The
REIT concept would seem to be the easier of the two, but the public equity
market would not be happy with the concentration of tenants and would
question who the tenants really are, as well as their creditworthiness.
Whatever happens, it is remarkable to think that a group of investors,
unknown to the skilled nursing industry just a few years ago, would now
control three of the formerly largest players in the sector with more than
700 nursing facilities. As Harry Grunstein is reputed to have stated when
asked how he could come out of nowhere, "America is a great country. God
bless America."
