In what may be the start of a trend, Select Medical Corp. said it had agreed to purchase fellow long-term acute-care pro-vider SemperCare despite facing litigation challenging another planned deal that would make Select Medical a private company.
Select Medical, Mechanicsburg, Pa., announced the signing of a definitive agreement to purchase Plano, Texas-based SemperCare for approximately $100 million in a deal expected to be completed during the first quarter of 2005, pending regulatory approvals.
Frank Morgan, a healthcare stock analyst with investment bank Jefferies & Co., said he has predicted that private LTAC companies would begin to consolidate. That Select Medical hasn't completed its transition to a private company, however, adds a twist to the announcement, he said.
In October, Select Medical announced plans to go private in a $2.3 billion deal with private equity firm Welsh, Carson, Anderson & Stowe, a deal that is also scheduled to close in the first quarter (Oct. 25, p. 12). However, two lawsuits challenging the deal were filed on behalf of Select Medical stockholders. The lawsuits are likely to be consolidated into one class-action lawsuit in Delaware Chancery Court, Wilmington.
The lawsuits allege that Select Medical didn't invite other offers or complete a fair market analysis to examine Select Medical's value. They say that since the deal calls for the retaining of several Select Medical executives, including founders Rocco and Robert Ortenzio, they will be able to profit from future company growth, while stockholders are being offered a "capped" buyout of $18 per share.
The lawsuits also name Tom Scully, former CMS administrator and a current adviser for Welsh Carson, as a defendant. The Ortenzios and Scully are expected to be on the board of EGL Holding Co., a new company that is to be formed as part of the deal between Select Medical and Welsh Carson, according to a preliminary proxy statement filed with the Securities and Exchange Commission by Select Medical earlier this month.
The proxy statement says Rocco Ortenzio would get $95 million, Robert Ortenzio $51 million and Scully $547,200 upon completion of the deal. The statement lists Scully as a nonemployee director with 30,400 shares of Select Medical stock as of Nov. 1.
Federal regulatory changes to the admission policies at LTACs-which Robert Ortenzio had said helped prompt the deal with Welsh Carson-were discussed when Scully was the CMS administrator but were completed after he left office. Under CMS regulatory changes, beginning in fiscal 2008 and after a transition period, most LTACs located within acute-care hospitals won't be able to take more than 25% of their patients from their host hospitals.
After final CMS admission regulations for LTACs were published in August, analyst Morgan wrote, "This change may very well open the door to consolidation of several private" hospital-within-hospital operators. A provider looking to add facilities would likely prefer to acquire existing hospitals-within-hospitals because those facilities-unlike their new brethren-won't immediately be subject to the 25% admission rules, he said.
With 82 facilities, Select Medical said it operates more LTACs than any other for-profit company, while SemperCare operates 17. Select Medical operates LTACs in at least 10 of the 11 states in which SemperCare has facilities and the two companies each operate an LTAC in Little Rock, Ark., according to August data from the CMS and SemperCare's Web site.