Merger plans announced last week by Hillhaven Corp. and Vencor have analysts wondering whether two companies that have been headed in opposite directions can successfully consolidate.
Vencor, a Louisville, Ky.-based operator of 35 long-term, intensive-care hospitals, accrued a tidy profit and grabbed the attention of Wall Street over the past several years by buying up struggling or closed hospitals and converting them into higher-margin, intensive-care hospitals.
Tacoma, Wash.-based Hillhaven, by contrast, had been considered by some analysts to be incapable of maximizing shareholder value partially because of its size and because for years its earnings had been siphoned off by its former parent company, Tenet Healthcare Corp.
So when the two companies announced their merger plans, shareholders and analysts had mixed reactions. Favorable for Hillhaven. Less so for Vencor.
The planned merger offers opportunities for improved efficiencies for the combined company and a challenge to Vencor to fully integrate Hillhaven's business, as well as its debt, with its own.
The Vencor deal offered Hillhaven an alternative to an uninvited takeover attempt by a rival nursing home chain-Albuquerque, N.M.-based Horizon Healthcare Corp. The deal gives Hillhaven semi-autonomy, whereas Horizon had planned to absorb Hillhaven's business.
Hillhaven's assent to Vencor's $1.9 billion stock buyout offer will create one of the nation's largest healthcare providers, with revenues of $2.1 billion.
The deal is the latest in a series of mega-mergers involving alternate-site providers, all of which hope their size and array of services will help them compete for lucrative managed-care contracts.
Hillhaven shareholders will receive $32.25 in Vencor stock in exchange for each of their shares under the merger agreement. Hillhaven will have 42.7 million shares outstanding after it completes its merger with Indianapolis-based nursing home chain Nationwide Care. Vencor has 33.2 million shares outstanding.
The deal is subject to shareholder and regulatory approval. It's expected to be completed by the third quarter.
Following news of the buyout, Vencor's shareholders, worried about the cost of the deal, began ditching the stock. It dropped from $37 per share on April 21, the day before the merger announcement, to a close of $30.63 on April 27, below the $31.75 limit that could allow Hillhaven to back out of the deal. Vencor's shares are traded on the New York Stock Exchange.
In addition, Standard & Poor's Corp. last week placed its B+ rating of Vencor's $115 million in subordinated debt on with negative implications.
In 1994, Vencor's net income increased 37% to $31.4 million, or $1.13 per share, from $22.9 million, or 85 cents per share, in the previous year. Revenues rose 42% to $400 million.
Long-term hospital operators like Vencor typically receive higher, cost-based Medicare reimbursement than acute-care hospitals, which are subject to fixed DRG payments.
But HCFA is considering decreasing, or eliminating, cost-based reimbursement for long-term hospitals, a move that could jeopardize Vencor's profit base.
However, Vencor officials see the merger as one that will complement its business. "We have identified clear synergies between the services now provided by Vencor and those which Hillhaven has successfully developed," said W. Bruce Lansford, Vencor's chairman and chief executive officer.
Hillhaven shareholders, meanwhile, appeared somewhat relieved by the deal. Its stock had jumped to $27.50 as of April 27 on the NYSE, close to its 52-week high of $29.25.
That's quite a difference from March, when shareholders nearly revolted after Hillhaven's board rejected Horizon's $1.4 billion buyout bid and ignored its revised $1.8 billion offer.
Horizon said it has no plans to make another run for Hillhaven after agreeing in March to buy Continental Medical Systems in a deal valued at $502 million.
"We are putting all of our efforts and resources toward completing our merger with Continental at this time," Horizon spokesman Michael Selliger said. "To my knowledge, there are no plans to look at the Hillhaven-Vencor deal."
The courtship of Hillhaven
Jan. 26, 1995: Horizon Healthcare Corp. proposes $1.4 billion
â– buyout of Hillhaven Corp.
Feb. 6, 1995: Hillhaven rejects Horizon's offer, cites desire to â– remain independent.
March 7, 1995: Horizon sweetens initial offer to $1.8 billion.
March 21, 1995: Hillhaven fails to respond to Horizon's March 21 deadline to accept offer.
March 31, 1995: Horizon agrees to buy Continental Medical
Systems for $502 million.
April 24, 1995: Hillhaven agrees to Vencor's $1.9 billion buyout proposal.