Just a few years ago, Genesis HealthCare Corp. was in bankruptcy and its industry - long-term care - was in financial turmoil.
Now, the Kennett Square nursing home company is the object of a nasty bidding war that has driven its potential sale price to $1.36 billion, up by more than a third since sale discussions began last summer. The bidding process has spawned a lawsuit from one of the suitors and led at least two major shareholders to complain that the Genesis board has unfairly favored one of the bidders.
Genesis announced yesterday that Formation Capital Corp. and JER Partners as well as their rival, Fillmore Capital Partners L.L.C., had upped their bids this week. A shareholder vote on the Formation/JER proposal was delayed for the second time until next Friday.
Northbrook GH L.L.C., which owns 5.1 percent of Genesis stock, responded in a letter to the board, saying the bidding process has been "biased" and asking for a later vote date to "allow all interested parties an opportunity to present their best offers." In its letter, Northbrook contends the company is worth $7 to $9 a share more than the current highest bid of $69.
"The bidding process has been unfair, and the decision making has been unfair," said David Heller, chairman of Advisory Research Inc., which owns 3.2 million shares - 17 percent - of Genesis stock.
After Genesis announced the new bids, its shares rose on a day when the overall stock market declined, closing at $67.83, up $1.55 yesterday.
The intensity of the activity is evidence of how much things have changed as well-funded private-equity firms have come to see nursing home chains, which were hit hard by changes in government funding in the late 1990s, as a growth industry.
"There's been a big privateequity push in the nursing home industry over the last three or four years," said David Stevenson, a health-policy professor at Harvard University who analyzed financial trends in the industry for the U.S. Department of Health and Human Services.
"I think it's a testament to the improved regulatory and reimbursement environment for skilled-nursing facilities," said James Kumpel, a health-care-services analyst with Friedman Billings Ramsey Group Inc.
Medicare funding has stabilized now. Chains, which operate more than half the nation's nursing homes, are positioning themselves as the cheapest setting to provide rehabilitation rather than as places that house frail, elderly people until they die, industry experts said.
This strategy has allowed some of the bigger chains - Genesis is the country's fifth-largest - to attract more patients covered by Medicare and private insurance. These pay better than Medicaid, which has traditionally accounted for a bigger share of nursing home revenue, experts said.
Both Formation and Fillmore already own nursing homes. Fillmore acquired Beverly Enterprises Inc. last year. Beverly put itself up for sale after a hostile bid from Formation.
In January, the Genesis board agreed to sell the company to Formation/JER for $63 a share. (An unnamed company that later dropped out of the bidding had started the bidding process with an offer of $51.50 a share.) Fillmore has continued to offer higher prices, forcing Formation/JER to do so as well. Shareholders were scheduled to vote today on an offer of $65.25 a share from Formation/JER, but Fillmore had offered $2 a share more, which did not sit well with investors.
"Two dollars on 20 million shares is more than petty cash to most people," Heller said.
Formation/JER upped its offer to $67.50 a share, plus interest, this week. Fillmore is now bidding $69 a share. The board is reviewing the offers. The current deal calls for Formation to get a $15 million termination fee if the deal falls through, down from $50 million.
Arnold Whitman, Formation's CEO, said his company, which owns 85 nursing homes and manages the property of an additional 180, saw Genesis as a high-quality company. "We're attracted to the opportunity of upgrading and modernizing the Genesis portfolio," he said.
Ronald Silva, president and CEO of Fillmore, said his company wanted to expand its long-term-care holdings. Beverly, which has 365 nursing homes and assisted-living facilities, does not see itself as a Genesis competitor, he said, but both have major concentrations in Pennsylvania and West Virginia. Unlike Fillmore, Genesis is strong in New Jersey.
"This would be expanding our network and also preserving an important factor we believe affects care, which is keeping real estate and operations together," Silva said.
The Fillmore model creates separate divisions to run the real estate and operate the nursing homes, but retains financial control of both. Formation has said a separate operations company would run the homes it owns.
According to a Genesis proxy statement that has riled Fillmore and some investors, Formation "indicated it then intended to retain existing management for the operation and management of the operating properties . . . but did not provide any further detail as to any proposed terms for retaining existing management."
Company leaders were later told not to discuss post-purchase employment, according to the proxy. Genesis CEO George Hager said he would not work for one of the bidders, labeled as Participant 2 in the proxy. Silva said that was Fillmore. Hager and other members of senior management supported Formation and expressed concern about Fillmore's ability to integrate its operations with Genesis' and "the potential risk to the company's current operations and patient care should such integration prove difficult and their lack of comfort with respect to the financial strength and condition of Participant 2's operations," the proxy said.
Silva said yesterday he did not know specifically why Hager did not want to work for him, adding that he was a "hard driver" and the son of two Marines. "This isn't reporting to a public board. This is reporting to me. We work very hard here," he said.
A Fillmore subsidiary sued Genesis in March, arguing that the process had unfairly favored Formation while Fillmore was offering higher prices.
Both Northbrook and Heller are calling for changes in the process.
"I want a fair, and decent, and even bidding process which favors nobody, and that has not happened," Heller said.
Formation and Genesis have declined to comment about the bidding.
In an SEC filing, the firm said the "lawsuit is without merit."
In the proxy, Genesis said that Pennsylvania law allowed the board of directors to consider factors other than whether shareholders were getting the best possible price. Directors are also allowed to consider the effects of their actions on employees, customers and their community, as well as the short- and long-term interests of the company.
Two bidders have pursued Genesis HealthCare Corp., the nation's fifth-largest operator of skilled-nursing and assisted-living facilities. Here is a look at what the Kennett Square firm has that they want.
Number of facilities: 210.
Number of beds: 25,800.
Occupancy rate: 92 percent.
Where it operates: Connecticut, Delaware, Maryland, Massachusetts, New Hampshire, New Jersey, North Carolina, Pennsylvania, Rhode Island, Vermont, Virginia and West Virginia.
2006 revenue: $1.8 billion.
2006 profit: $35.9 million.
SOURCE: Company documentsEndText