Providing the denouement to what has been a terrible stretch in the business life of the nation's nursing home industry, long-term care's consummate survivor, Manor Care(NYSE: HCR), announced this morning that its board has assembled a special committee to consider a possible sale of the company. According to a less-than-loquacious press release, Manor Care has already received a buyout proposal from an investor group including senior managers and is open to other offers. The financial advisor has been contacted, the law firm has been notified. All that needs to happen now is for the right stock market dog lover to appear and provide a new home for this sick puppy.
The management group mentioned in the press release apparently does not include Manor Care Chairman Stewart Bainum, Jr., who expressed his own rival desire to maintain steerage of the company today. In a letter to special committee co-chair and company director William Longfield that was included in a federal filing, Bainum said he is interested in "pursuing a possible recapitalization, leveraged buyout or similar transaction" that would be at a "share price significantly in excess of the current price." The potential for a bidding war pushed Manor Care's stock up nearly 40% this morning as the firm regained its inglorious status as the only remaining publicly traded nursing home operator with a double digit share price.
As the nation's largest owner and operator of nursing homes, Manor Care was one of the few companies that had a swimsuit on when the industry's tide went out in a big way last year, revealing that many players were in fact swimming naked. High debt loads -- the lasting balance sheet souvenirs of an earlier consolidation craze taken too far -- combined with Medicare and Medicaid reimbursement cutbacks in the Balanced Budget Act of 1997 to decimate share prices across the industry in 1998 and again in 1999. Like Clint Eastwood at the end of some bang-em-up spaghetti Western, Manor Care was basically the lone gunfighter left standing in the whole town when the smoke started to finally clear late last year.
While not completely immune to the sector fallout, Manor Care kept its head above water when so many of its peers were drowning thanks to its past fiscal discipline and its flexibility to quickly adjust to the present's changing conditions. Management largely steered clear of the leverage smorgasbord prevalent in the sector in the late 1990s. And when Medicare switched to a prospective payment system (PPS) for cost reimbursement in 1997, the company reconfigured its business for the new financial realties faster than any of its rivals.
The result? Many of its peers are now insolvent, but Manor Care has managed to stay profitable. Excluding certain charges and an ugly $274 million write down of an investment in preferred shares of now-comatose rival Genesis Health Ventures(NYSE: GHV), the company reported positive Q4 EPS of $0.30 per share. Meanwhile, the balance sheet recently showed $2.3 billion in total assets, funded largely by $980 million in equity and $892 million in long-term debt. With all of the company's 450 facilities on board the PPS boat and some of the federal reimbursements recently restored with the passage of the Balanced Budget Refinement Act, Manor Care has been forecasting "significant growth" this year.
With its share price hitting a low of $8 1/4 on Monday, Manor Care's market cap of $888 million may have just become too cheap for its management to ignore. After all, investors with great experience in an industry and a firm grasp of a company's prospects have to be expected to jump when Mr. Market throws them what they feel is the payoff pitch of a lifetime. That's what Bainum and his fellow Manor Care managers are telling investors is happening right now, anyway. However, the company may not remain a publicly traded entity long enough for investors to share in any potential, long-term reward.
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