Manor Care/Carlyle Seek to Close Deal, But Regulatory Scrutiny Has Resulted in Delays
According to a company press release, on July 2, 2007, Manor Care (NYSE: HCR) announced board approval of an all cash $6.3 billion dollar transaction with Carlyle Group to take the company private. The deal contemplated that shareholders would receive $67.00 per share, a twenty percent premium in relation to the closing price on April 10, a day before the company announced it would "evaluate strategic alternatives," and thereafter received shareholder approval.
The timing of the transaction comes amidst increased state and federal scrutiny of private equity fund buyouts of nursing homes. This transaction and others similar signal a shift in nursing home deals--not only in the sense that consolidation and ownership by private equity funds is becoming more prevalent as the baby boomers are set to retire, but also in the sense that regulatory scrutiny of transactions involving the facilities may be different, and perhaps more vigorous, than it has in the past.
Recently, the New York Times ran a string of articles addressing the new issues arising out of consolidation and fund ownership, including:
- Nursing Home Buyouts Face Scrutiny (From the New York Times Deal Book) (“Nursing homes aren’t just investment vehicles,” Mr. Baucus said in a statement. “They’re homes for some of America’s most vulnerable citizens.”)
- Inquiries at Investor Owned Nursing Homes (“There are serious concerns that private equity firms are reducing the care at nursing homes by decreasing the number of employees,” Mr. Dingell said. “We’ve been made aware that nursing home residents are losing their ability to use lawsuits to fight poor care, and that people may be suffering.”)
- At Many Homes, More Profit, Less Nursing ("But in recent years, large private investment groups have agreed to buy 6 of the nation’s 10 largest nursing home chains, containing over 141,000 beds, or 9 percent of the nation’s total. Private investment groups own at least another 60,000 beds at smaller chains and are expected to acquire many more companies as firms come under shareholder pressure to sell.")
Transactions such as the proposed Manor Care/Carlyle deal often trigger prior approval and notification reporting requirements. For example, many states require that, upon a change of ownership at the operating company level, the entering operator must apply for a new license. Some states also require that the new entity obtain a certificate of need before the transaction may close. As you might expect, the regulatory process is often fairly involved, requiring the submission of ownership information, information about the incoming management team, a demonstration of financial solvency sufficient to maintain the facilities, and staffing numbers. Many times, the applications are deemed incomplete by regulators, requiring that the applicant submit further information to satisfy the regulators' questions and thereby requiring that the closing date be pushed back.
In the Manor Care/Carlyle transaction, a few state officials and regulators have indicated a desire to more closely scrutinize the deal, delaying the closing date. In an unprecedented move, the State of West Virginia Health Care Authority granted the requested certificate of need, but then rescinded the decision shortly thereafter in response to an appeal filed by the Service Employees International Union. In an article published by the State Journal, Rick Rump, assistant vice president of corporate communication at Manor Care, is quoted as stating, "No other state approved a certificate of need and then stayed the process, and it's the first time in West Virginia, too. They've never granted a CON and then rescinded it," Rump said. "It's an odd precedent." The Health Care Authority will hold an administrative hearing at 9 a.m. Dec. 14 at 100 Dee Drive, Charleston to reconsider its decision.
