For arbitrageurs who make a living off the difference between a stock's trading price and what a suitor has promised to pay, Beverly Enterprises Inc. (), the giant nursing-home operator, seems like easy pickings. Beverly has agreed to be taken over by a group of real estate investors for $13 per share, yet the stock has been trading at under $12. If the $1.9 billion deal goes through in six months, an arb would get a big payday -- a 15% annualized return.
But the arbs may also be sweating a few bullets. Beverly has been on a bumpy trip toward a critical Nov. 18 deadline to lock in its deal. That's when its chosen buyer, a company called North American Senior Care Inc., formed by real estate financiers expressly for the buyout, will have to disclose the sources of some of its funding and put up a $60 million deposit.
NASC already got a two-month extension to line up its financial commitments. Then Wachovia Corp. () dropped out as the principal banker and Credit Suisse First Boston LLC stepped in. Some industry sources believe that NASC, which didn't respond to calls from BusinessWeek, may still be scrambling to recruit equity investors.
While NASC may yet come up with the money, all hell has broken loose in the politically charged nursing-home industry. Consumer groups, trial lawyers, labor unions, and politicians are mounting an aggressive attack against the takeover. They worry that patient care and accountability will suffer in Beverly's 350 nursing homes if NASC later sells the land as other nursing-home operators have done. "What we have here is the megachains being stripped of assets," says Barbara Hengstebeck, president of the National Citizens' Coalition for Nursing Home Reform.
The Beverly-NASC deal is the target of lawsuits in Arkansas, Beverly's home state and one of its biggest markets, and legislative hearings in Mississippi. "There's a whole lot of taxpayers' dollars spent on this industry, and we're going to make sure it gets spent wisely," says Mississippi state Representative Jamie R. Franks Jr.
Now, the Service Employees International Union has jumped into the fray, alleging that other nursing homes taken over by outside investors have a pattern of increased patient-care violations. The SEIU says the allegation is based on its own study of state-by-state records. NASC isn't talking.
Beverly insists that concerns about care are not warranted. "We don't believe the ownership structure will have anything to do with running the business and the need for compliance or quality of care," argues James Griffith, senior vice-president. "This industry is one of the most highly regulated in the country." He points out that even if the land is sold, rent must be paid for the business model to work -- and that depends on the homes attracting and keeping patients.
Griffith may be right that an operator doesn't need to own the real estate under its nursing home to provide good care. It's a model that some nursing homes have followed for years -- and one that has been used in countless industries to free up capital.
But Beverly isn't helped by questions about NASC as a relative newcomer to the field and its lack of transparency. Neither its ownership structure nor plans for Beverly have been disclosed. Beverly says those will come out in proxy materials. The main name linked with NASC is New York real estate lawyer Leonard Grunstein, a partner in Troutman Sanders LLP. Grunstein's brother Harry was an architect of earlier buyouts of Mariner Health Care and Integrated Health Services Inc. that have purchased about 400 homes in 35 states. Neither Grunstein returned phone messages.
If NASC is to prevail, it not only needs to come up with the money but also to defuse the growing criticism it faces. Otherwise the deal will look increasingly risky, and those arbs are going to get a lot more nervous.
By Mark Morrison