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Grace Under Fire Once Again


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GRACE UNDER FIRE ONCE AGAIN

It was in the bag. Dr. Constantine L. Hampers had been passed over for the top job at W.R. Grace & Co. But his prospective consolation prize was rich indeed: In June, Grace had agreed to spin off National Medical Care Inc., the $1.9 billion dialysis company Hampers had founded, then sold to Grace. Hampers would retain management control of the unit and as much as a 10% stake for him and his team.

But that deal isn't going anywhere just now. The government has initiated a wide-ranging investigation into NMC's business practices, and Grace is conducting an internal audit to satisfy a consortium of lenders lined up to provide the $1.2 billion special dividend NMC was to pay Grace. In case the financing falls through--a distinct possibility--Grace is talking to other suitors about a sale, spin-off, or combination.

And Hampers no longer wields much power. A few months ago, Grace's executive vice-president threatened to leave and take NMC's top management with him unless the spin-off deal was done. Now, "Gus Hampers...is not going to be the person responsible for making the decision of what happens to NMC," says an outside adviser to Grace. "He may have a strong suit, but the rest of the directors and [Grace Chief Executive Albert J.] Costello hold the trump card."

LINGERING DOUBTS. Hampers' credibility with investors has been severely weakened by a string of charges against the operation he dominates. In October, the U.S. Health & Human Services Dept. and the U.S. Attorney for Massachusetts began investigations into billing practices at NMC's dialysis, laboratory services, and home health-care divisions. The month before, Grace had disclosed that NMC's LifeChem laboratory division had collected $4.9 million in overpayments from Medicare because of billing problems. LifeChem repaid the amount.

While Grace is still conducting its own audit, NMC says it believes it has been in "material compliance" with applicable laws and regulations. But two other grand jury investigations, initiated last spring, are questioning whether NMC sold defective products and made illegal payments to NMC medical directors. And a scathing recent series in The New York Times questioned quality control and NMC's aggressive competitiveness. As the investigations mount, Hampers "has fewer and fewer allies in the shareholder base and the top management of Grace in terms of the way he has run NMC," says one analyst. "It couldn't look worse for him."

Which isn't to say that Costello is beaming. The CEO, who came to Grace in May, had hoped to shed the health-care unit by yearend to concentrate on Grace's specialty chemicals businesses. His compensation hinges largely on Grace's stock price, which would be buoyed by a successful spin-off. Now, though, Costello says that outcome has been delayed at least until early 1996.

No surprise, then, that Grace is inviting new suitors, either for a purchase or some form of joint venture. Investors and analysts say four companies are interested: Baxter International, the largest supplier of dialysis products; Vivra, the second-largest provider of dialysis services in the U.S.; Swedish dialysis products manufacturer Gambro; and Fresenius, a German-based dialysis equipment maker. All four companies did not comment.

ABUNDANT CASH. The question is price. Hampers originally proposed to buy NMC for $3.5 billion, a deal rejected in favor of a tax-free spin-off. To get the same value as the spin-off, a buyer would have had to lay out $4 billion to $4.5 billion. Now, Bear, Stearns & Co. analyst Jeffrey J. Cianci says the government investigations may have taken $300 million of NMC's value. The drop in Grace's stock price implies an even bigger hit: Analysts say NMC accounts for just $16 of Grace's $62 share price, down 40% from the estimated valuation NMC carried after the spin-off was announced.

That said, NMC remains "a valuable asset and could have huge potential synergies with prospective buyers," says Andrea Schaefer, an analyst at UBS Securities Inc. And the most likely buyer remains Baxter. Next year, Baxter will split itself into two operations; NMC, whose operating profit last year reached $333 million, would provide abundant cash to the newly formed medical technology company.

Indeed, Baxter had been in talks with NMC about an acquisition last year, but the deal was scuttled, according to Hampers, over "control issues." Translation: Hampers wanted to run the show. These days, Grace says, he's still involved in the talks--and his personal relationship with Baxter CEO Vernon R. Loucks Jr. might guarantee some future management or consulting role. But he likely won't end up on top.

GRACE'S TROUBLED SUBSIDIARY

The recent history of National Medical Care

MAY 1

Albert J. Costello, former American Cyanamid CEO, is named Grace's CEO, besting Constantine L. Hampers, chairman of Grace's National Medical Care unit

MAY 4

Hampers presses Costello to accept a $3.5 billion management buyout of NMC, a kidney dialysis and health-care operation

JUNE 14

Grace directors opt to spin NMC off to management, proposing that NMC pay Grace a $1.2 billion dividend in the split

OCT. 18

Federal and state agencies serve five investigative subpoenas against NMC concerning suspect Medicare/Medicaid payments and reimbursements

DEC. 4

Grace announces a delay in the NMC spin-off, and initiates talks with other companies about possible sale of the unit or other transactions; The New York Times begins a series of scathing articles on the companyBy Gail DeGeorge in Miami, with Ron Stodghill II in Chicago


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