Orange County will lose a corporate headquarters if the pending $275 million acquisition of Irvine-based Sun Healthcare Group Inc. by Genesis HealthCare LLC goes through as expected this week.
Irvine-based Sun’s shareholders will vote Wednesday whether to accept privately held Genesis’ buyout offer, which was made in mid-June.
Genesis said in a statement that it “will continue to be headquartered in Kennett Square, Pa.” The company reiterated that it hasn’t decided what to do with Sun’s offices in Irvine and Albuquerque, N.M.
Sun operates nursing homes, rehabilitation centers and hospices, and also has a medical staffing service. It employs about 150 people in Orange County, including 35 in its Von Karman Avenue headquarters, and another 250 in Albuquerque.
The combined company would have more than 420 facilities and 75,000 workers, with some $4 billion in annual revenue, if shareholders approve the deal.
Genesis’ statement didn’t mention whether Sun executives, including Chief Executive William Mathies, will stay after the deal closes, although it has made provisions for the possibility of his departure.
Mathies is set to receive just more than $6 million if Genesis terminates their employment after the deal is made final, according to Sun’s preliminary proxy statement with the Securities and Exchange Commission. Chief Financial Officer L. Bryan Shaul is due about $2.9 million if that happens, according to the filing.
Non-Compete
The executives have agreed “not to solicit Sun’s employees or customers” for a period of two years if they do leave, according to the proxy statement.
The proxy statement also gives some account of actions leading up to the Sun-Genesis deal.
Seeds were sown in late March 2011, when representatives of New York-based Barclays Capital Inc., Genesis’ financial advisor, told Mathies and Shaul that its client “was interested in exploring the benefits of a potential business combination transaction” with Sun, according to the filing.
• Headquarters: Irvine
• Business: nursing homes, rehabilitation centers, hospices; medical staffing service
• Founded: 1989
• Ticker symbol: SUNH (Nasdaq)
• 2011 revenue: About $1.93 billion
• Recent earnings: ($980,000) for Q2
• Market value: About $216 million
• Notable: $275 million sale to Kennett Square, Pa.-based Genesis HealthCare LLC pending
Mathies told Sun’s board in April 2011 that Barclays had approached it regarding Genesis, and that management agreed to an introductory meeting. Sun directors then authorized Mathies to engage in preliminary discussions.
Sun and Genesis suspended discussions shortly afterward because the Centers for Medicare and Medicaid Services issued a proposal for cuts in Medicare reimbursements to nursing homes, with a target date of Oct. 1, 2011.
Sun’s shares slid 14% on April 29, 2011, the day after CMS issued the notice.
Regulators eventually settled on a Medicare Part A reimbursement cut of 12.6% to nursing homes.
The decision pushed Sun toward a sale because “that put a lot of stress on their business,” said Kevin Campbell, a nursing home analyst who follows Sun for Avondale Partners LLC of Nashville, Tenn.
Sun acknowledged as much in its filing:
“The adverse impact of these reimbursement challenges on our cash flow and available liquidity, in addition to our current capital structure, limits our ability to make strategic investments in facilities and infrastructure and expand our hospice business and increases the risks of remaining independent.”
Barclays contacted Mathies in August 2011 to re-engage in discussions, according to the filing. Mathies said he believed Sun would be interested in resuming talks.
A Genesis investor representative then got in touch with New York investment bank MTS Securities LLC, Sun’s financial advisor, to talk about next steps, including entering into a confidentiality agreement.
Sun did not have other potential bidders lining up for a shot at the company.
Sun’s filing shows that directors talked about various possible alternatives to Genesis but concluded that there was “the low likelihood of interest from a private equity buyer and the low likelihood of a more attractive stock or cash proposal from another strategic buyer.”
Lone Bidder
Analyst Frank Morgan of RBC Capital Markets in Toronto wrote at the time Sun and Genesis announced their transaction that he didn’t expect any competing bidders to emerge.
Sun’s filing also touches on a letter that it received in December from Clinton Group Inc., an investor that called for “the company’s sale given the pessimistic market and decline in our stock price.”
Sun said in its filing that, in the time between Clinton making its letter public and the June announcement of its deal with Genesis, “we did not receive any substantive indications of interest in a potential acquisition of the company.”
Company directors decided that seeking to sell Sun in “an active sale process” was not in the best interest of the company and stockholders, and continued talking with Genesis. That also included sharing of due diligence.
Talks between the companies continued throughout the year and eventually led to Genesis making an all-cash offer of $8.50 a share in mid-May, down from a previous offer of $9.50, according to Sun’s filing.
Sun’s filing shows that Genesis’ chief executive, George Hager, said his company pulled its richer offer after conducting its due diligence reviews. Genesis’ representatives reiterated that they wouldn’t consider a higher price, the filing shows.
Genesis’ board of managers approved the agreement to buy Sun on June 20.
Competitors
Sun’s departure from the public markets doesn’t “have a material impact” on its two Orange County-based publicly held competitors —Skilled Healthcare Group Inc. of Foothill Ranch and Mission Viejo-based Ensign Group Inc., analyst Campbell said.
Ensign and Skilled were affected by the cuts, but Sun’s higher debt load put more pressure on it, he said.
Sun’s spin-off of Irvine-based Sabra Healthcare REIT Inc. in 2010, which took over the company’s real estate portfolio, likely played a factor in the decision to sell, Campbell said. Sabra now leases properties to Sun, as well as Genesis and others.
