After much of its stock changed hands, Beverly Enterprises decided to change its strategy.
The long-term-care provider's board voted unanimously last week to auction the Fort Smith, Ark.-based company off after weeks of investigating ways to stave off a hostile takeover from a group of investors led by Formation Capital, a senior-housing equity company based in Alpharetta, Ga.
The board instructed its financial advisers, Lehman Bros. and J.P. Morgan Chase & Co., to start contacting bidders including the Formation Capital group, which is working with Appaloosa Management and Franklin Mutual Advisers.
Beverly Enterprises Chairman and Chief Executive Officer William Floyd said current management has considered making a bid for the company. Management owns 4.99% of the company, with Floyd owning 1.85%. If a sale were completed, Floyd and three other executives would be eligible for severance payments of up to three years' base salary plus bonuses and vesting stock interests, according to a Securities and Exchange Commission filing.
Earlier this year, Beverly's board rejected a $1.53 billion buyout offer from the Formation Capital group, saying it wasn't in the stockholders' best interest.
Since then, the majority of Beverly's stock has been traded, and much of it is now owned by short-term investors.
Those short-term investors include Formation Capital, which owns 8.1% of the stock, as well as hedge funds and arbitrageurs-investors who acquire stock with the intention of making a quick gain. Combined these groups owned 48% of Beverly's stock as of March 18, up from 7% on Dec. 31, 2004, according to SEC filings. Those investors "have a very short-term investment horizon" and are seeking a quick profit, Floyd said.
Institutional investors-organizations that invest with expectations the stock prices will gradually increase-owned 29% of the stock on March 18, compared with 65% at the end of 2004, according to the filing. One of the larger transactions from institutional investors involved Merrill Lynch & Co., which owned 970,000 shares on March 18, down from 5.8 million shares at the end of last year, according to an SEC filing.
The new stockholders are likely to vote for Formation Capital's nominees for the Beverly board at an April 21 meeting, Floyd said. Although that would make it easier for the Formation Capital group to complete a buyout, Formation Capital Chairman and CEO Arnold Whitman said he's happy Beverly has decided to contact other suitors.
"We always wanted open negotiations," Whitman said. He has also indicated his group would consider raising its initial purchase offer.
If successful in the buyout, Whitman said he plans to use the same business model that the company has employed at the 152 nursing homes it has acquired since 2001, 49 of which were purchased from Beverly Enterprises. That model includes separating the land from the operations of each nursing home by creating one entity that would own the real estate and another to hold the operating license.
In a research note, Jerry Doctrow, an analyst with investment banker Legg Mason, said the business structure could lower overall patient liability costs at the facilities to about $20 million from about $66 million. Mariner Health Care, which took its 250 nursing homes private after completing a $1 billion merger with National Senior Care at the end of 2004, is instituting a similar business structure for its nursing homes, Doctrow said.
Along with lowering the liability costs, Whitman said his company would team with care providers to improve the quality of care at Beverly's 347 skilled-nursing facilities, which contributed to its revenue of nearly $2 billion in 2004.