The first half of this year in the non-acute sector will be remembered for the mega-deals in subacute care, long-term care, home healthcare, outpatient staffing and rehabilitation.
However, some agreements haven't turned out quite as planned. Parties have diluted, delayed or called off deals during the past few months in reaction to a dip in stock prices and other market forces.
In the wake of blockbuster merger announcements such as the $1.9 billion deal between Vencor and Hillhaven Corp., many companies are trying to structure dream deals of their own.
Companies recognize that they must consolidate to survive. "The greater critical mass is needed to cut deals with suppliers and managed-care organizations," said John Runningen, an analyst with the investment firm Robinson-Humphrey Co. in Atlanta. "If they're in the same business, they also take out a potential competitor."
That strategy paved the way for the recent consolidation of Abbey Healthcare Group and Homedco Group into home-care giant Apria Healthcare Group. Their deal closed June 28 with the original terms.
Yet in the past few weeks, some outpatient-care companies have balked as the terms were laid out and proxy information was disclosed.
"The deals that were getting done were often at lower total prices," said Stephen Monroe, a partner at Irving Levin Associates, a New Canaan, Conn.-based financial services firm that tracks healthcare mergers.
Falling stock prices in the past two months have proved to be the nemesis of some healthcare companies trying to get mergers off the ground, analysts say.
The market's volatility may stem from "the whole legislative attack on containing Medicare costs in the long-term-care industry," Monroe said. Buyers often become wary of acquisition targets that rely heavily on government reimbursements in this climate, he said.
When the buyer company's stock drops and the seller's stock remains stable, deals can fall through when the seller realizes it's just not worth it. Red lights go on when the buyer's stock price falls out of a predetermined range that would be acceptable to the buyer.
However, Monroe said he expects most of the announced deals to be completed because companies' stocks tend to rise and fall relative to each other.
In the home health, long-term-care and rehabilitation sectors, 48 transactions were announced in the first quarter of 1995, compared with 42 in the year-ago quarter and 14 in the fourth quarter of 1994, according to Irving Levin Associates.
As of June 29, the Furman Selz/MODERN HEALTHCARE composite stock index for healthcare providers and services had fallen 8.9% for the year and had risen 5.7% for the previous 12 months. It had fallen 4.6% in the past four weeks.
Three deals fell through or were watered down on the same day:
Coram Healthcare Corp.'s stock has fallen about 50% since its April announcement that it would merge with Lincare Holdings, a Clearwater, Fla.-based home respiratory company. On June 22, Lincare put the deal on hold.
Now, some analysts expect the transaction to collapse because Coram's first-quarter earnings were lower than expected. If the deal goes through, it would form a new company with estimated annual revenues of $1.1 billion. Denver-based Coram, the nation's largest home infusion company, aimed to expand its range of home health services to rival those offered by Apria.
Living Centers of America, a Houston-based nursing home chain, purchased Brentwood, Tenn.-based Rehability, an outpatient rehabilitation company, for 26% less than planned. Living Centers insisted on negotiating the price after Rehability reported lower first-quarter earnings than expected.
Living Centers paid $11.50 per share of Rehability in cash and assumed $33.3 million in debt, for a total of about $118.4 million. In the original agreement, Living Centers had said it would pay $16 per share and assume $36 million in debt, for a deal totaling about $159 million. That transaction also occurred June 22.
The same day, Continental Choice Care withdrew from a proposed $25 million deal with International Nursing Services. Continental, a dialysis and home infusion company based in Florham Park, N.J., surprised the Denver-based home-care and nurse staffing firm when it decided the risk wouldn't be worth it.
Four more deals also were amended recently:
Horizon Healthcare Corp., Albuquerque, N.M., completed its purchase of Continental Medical Systems of Mechanicsburg, Pa., for $380 million July 10, down 24% from the deal's original estimated worth of $502 million. Because prices dropped, Continental stockholders got $9.75 worth of Horizon stock per Continental share; they had been slated to receive about $13 per share.
Because of falling stock prices, Sun Healthcare Group, also in Albuquerque, lowered its purchase price on two properties, CareerStaff Unlimited of Houston and Golden Care of Indianapolis.
In the CareerStaff deal, which closed June 21, each share was exchanged for 0.87 of a share of Sun common stock, instead of the rate of 0.79 of a share announced in March. The total paid for the therapist staffing firm was reduced to $107.2 million from a planned $143 million, a 25% reduction.
Sun Healthcare boosted the number of shares it paid to shareholders of Golden Care, a privately held respiratory therapy company, by 8% to 2.3 million shares. Sun Healthcare, a long-term-care company, closed that deal May 12.
Mariner Health Group signed an interim management agreement with Convalescent Services, putting off the close of their planned merger. Mariner, a Mystic, Conn.-based subacute-care company, will temporarily operate Convalescent's 27 inpatient facilities. Mariner reconsidered the deal when Convalescent Services, a Dallas-based nursing home operator, showed recent drops in operating revenues and pre-tax income because of lower-than-expected patient census. Mariner expects to purchase CSI, according to the original plan, for $180 million in January 1996.