Deal to Create A Big Chain In Elder Care

Posted on: October 19, 2015

Source: The New York Times
Author: Milt Freudenheim

Genesis Health Ventures Inc. said yesterday that it had agreed to buy the Multicare Companies Inc. for $1.06 billion in cash, with backing from two investor groups. The deal would continue the rapid consolidation of the nursing home industry, creating one of the biggest chains of homes and outpatient services for the elderly in northern New Jersey, the Boston area, Pennsylvania and West Virginia.

Analysts said Genesis was paying a high price. But they said it was buying a solid business in markets with opportunities for cost savings and profit in taking over responsibility for sick elderly patients of health maintenance organizations.

The deal, which is subject to regulatory approval, would create a new company, the Genesis Eldercare Acquisition Corporation. Genesis Health and the investor groups are offering $28 for each share of Multicare, which is based in Hackensack, N.J. On the New York Stock Exchange yesterday, Multicare stock rose $1.25, to $26.875. Genesis Health Ventures rose 25 cents, to $35.375.

Multicare was started in 1984 by two young lawyers, Daniel E. Straus, who is now 40, and his brother Moshael J. Straus, 44, with four nursing homes they inherited from their father, Joseph. They took the company public in 1993 at $10 a share and later split the stock, 3 for 2, making its adjusted original cost $6.67.

”We made a lot of money for a lot of people,” Daniel Straus said yesterday. The Straus family will get about $455 million for their 43 percent stake in Multicare.

Genesis Health Ventures will pay $300 million and will get a 42 percent stake in the new company. The investors — the Cypress Group of New York, which includes James A. Stern and three former colleagues in a buyout unit at Lehman Brothers, and the Texas Pacific Group — will pay $420 million and will get the other 58 percent. There will also be $675 million in senior debt financing, and the new company will assume $342 million of Multicare’s debt.

The Texas Pacific Group, based in San Francisco and Fort Worth, is a sponsor of TPG Partners II L.P., a $2.5 billion partnership specializing in corporate acquisitions.

Michael R. Walker, chairman and chief executive of Genesis, said the deal would enhance his ”strategic mission” — to provide a full range of health care services for the elderly on the East Coast. Genesis has 17,000 nursing home beds; Multicare has 15,000 plus 1,000 in assisted living residences for people who need less care.

The combined company would also provide day care centers, rehabilitation after strokes and accidents, home health care and prescription drugs for nursing home patients.

Mr. Walker said Multicare was the dominant provider in Boston and three New Jersey counties, Bergen, Morris and Essex, where it has 13 nursing homes. It has 20 percent of the market in West Virginia.

Mr. Walker is negotiating with Blue Cross plans and other managed care companies, offering discounts and case management for elderly patients with chronic conditions like depression or memory loss.

He said the object was to keep them ”independent and outside a nursing home.” In the fall, he said, Genesis will also start selling advice, supervision and referrals to appropriate services to people taking care of elderly parents or spouses.

Peter J. Sidoti, a health care analyst with NatWest Securities, said Multicare was ”a jewel in the nursing home business, in quality of care and quality of management measured by earnings growth and stock price appreciation.”

The selling price was ”at the top end of the range,” compared with similar recent big mergers, Mr. Walker said. The deal was valued at 13.4 times Multicare’s 1996 cash flow of $104 million, defined as earnings before interest, depreciation, taxes and amortization. That compares with a factor of 8.7 in another recent nursing home deal, Living Centers of America’s $1.8 billion merger with Grancare Inc. last month, and 9.8 in the acquisition of Theratx Inc. by Vencor Inc. for $354 million in February, Daniel Straus said.

Projected 1997 cash flow for Multicare, based on the first three months, was $115 million, bringing the purchase multiple to 12.1, he added.

Margo Vignola, an analyst with Merrill Lynch, said Genesis, which is based in Kennett Square, Pa., had been effective in catering to the desire of the elderly to stay out of nursing homes. It was ”the first nursing home company to recognize that it could do better if it did not keep people in a bed,” she said.

Mr. Walker said Medicaid patients accounted for 60 percent of the Genesis ”population,” low-income people for whom ”we don’t get paid an adequate amount,” he said.

By contrast, Multicare gets about 32 percent of its payments from Medicaid and 42 percent from patients who pay out of pocket, Mr. Straus said. Most of the rest are financed by long-term-care insurance or Medicare, the Federal program for the elderly and disabled, which provides limited coverage. He said charges in the company’s 155 homes averaged $160 a day.

Daniel Straus said Medicaid was ”becoming less prominent” in the mix of nursing home patients because of pressure from managed care companies that push patients out of hospitals before they are well enough to go home. Nursing homes can then give such patients post-acute care, which is more lucrative than simply providing custodial care, much of it financed by Medicaid, for patients with limited needs.

Bank financing for the deal will be provided by the Mellon Bank, Nationsbank, First Union and Citibank. Morgan Stanley, Dean Witter, Discover and Montgomery Securities will provide a $200 million bridge loan commitment to be replaced by high-yield-bond financing.