More long-term-care companies are likely to partner with investment firms as the industry continues to consolidate, Wall Street analysts say.
"The nursing home industry is on the verge of significant changes in reimbursement that will create opportunities for efficient providers," said John Hindelong, an analyst with Donaldson, Lufkin & Jenrette in New York. "The number of financial investors willing to take the risk that they can improve profits in what will be a very different industry in the next millennium is increasing."
Two recent deals kicked off the move toward bringing more financial muscle into play in the long-term-care industry.
In May, Houston-based Living Centers of America and Atlanta-based GranCare agreed to a $1.8 billion merger. The plan includes a $228 million investment from New York-based Apollo Management, which will own a 45% stake in the combined company (June 23, p. 50).
Then last month, Kennett Square, Pa.-based Genesis Health Ventures formed a new company with New York-based Cypress Group and Fort Worth, Texas-based Texas Pacific Group. Genesis put in $300 million, and the investment firms ponied up $210 million each for a 58% share. The new partnership has agreed to buy Hackensack, N.J.-based Multicare for $1.4 billion (June 23, p. 46).
"This is the first time financial buyers have entered the nursing home industry," noted Scott Mackesy, an analyst with Morgan Stanley in New York. "It's created some excitement. The strategic partners bring the opportunity for synergies to the table, and the financial partners bring access to capital."
Mackesy said venture capitalists have typically provided seed money for long-term-care startups with the intent of taking them public and cashing in. He said opportunities for consolidation and undervalued stock prices now are leading to deeper commitments from investors.
As a financial buyer, explained Peter Copses, a partner with Apollo in Los Angeles, his firm has a large pool of capital to invest but does not function as a manager of operations. "We're looking to take large stakes in companies that already have an infrastructure," Copses said.
Jim Coulter, a principal with Texas Pacific Group in San Francisco, said financial buyers in other industries with a lot of mergers-and-acquisitions activity, such as telecommunications and defense, are also choosing to partner with companies rather than compete with them for acquisitions.
Coulter said the investors end up benefiting from the efficiencies created by combining two companies instead of purchasing just one.