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Behind $7.4B Buy: Deal Timing, Size, Wave of Boomers

Nationwide Health Properties Inc.’s pending acquisition by Ventas Inc. comes down to timing and demographics.

The Newport Beach healthcare real estate investor said last week it was being bought for $7.4 billion by Chicago-based competitor Ventas—a deal that’s the largest in Orange County this year, and likely the largest ever here.

Including debt, the Nationwide acquisition tops Brea-based Beckman Coulter Inc.’s pending $6.8 billion sale to Danaher Corp., a Washington, D.C., conglomerate.

Both deals spurred big price tags and come as corporate buyers look to make deals before the cost of doing so goes up, according to analysts.

“Anybody who’s looking at an acquisition has to be cognizant of the fact that interest rates could go up over the next 12 months,” said Robert Mains, who follows Nationwide and Ventas for Memphis-based investment bank Morgan, Keegan & Co.

Higher interest rates stand to increase the cost of borrowing for companies that use debt for acquisitions.

Nationwide sought a buyout to be more competitive, Chief Executive Douglas Pasquale said in a conference call last week.

Size, diversification, a strong balance sheet and cost of capital “would become increasingly important in an industry we believe will become even more competitive,” he said.

Nationwide spent roughly eight months forming a plan that led up to the deal, Pasquale said.

Pasquale offered a bit of humor when asked about how the companies came together:

“(Ventas Chief Executive Debra Cafaro) and I just got married, and there is no way I am going to reveal my dating history,” he said, drawing laughter from the analysts and investors on the call.

The deal is set to close in the third quarter.

The acquisition is set to form the largest U.S. healthcare real estate owner and investor, according to Ventas.

Its shareholders will own about 65% of the combined company with Nationwide shareholders at 35%.

With Nationwide in the fold, Ventas will have more than 1,300 properties in 47 states, the District of Columbia and two Canadian provinces.

• Headquarters: Newport Beach

• Deal: being acquired for $7.4 billion

• Business: healthcare real estate investor

• Portfolio: $5.1 billion

• Holdings: 663 facilities, one land parcel, two development projects

• Facilities: assisted living, nursing homes, hospitals, medical offices

• 2010 revenue: $439.3 million, up 14%

• 2010 profit: $143.8 million, flat

Demographics

Demographics are a big part of the deal.

Many of those properties will cater to people who are 65 and over. They’re expected to be the fastest-growing group in coming years with the aging of baby boomers.

Senior housing, including assisted and independent living facilities, will make up a quarter of the new Ventas’ net operating income.

Senior housing’s “an important part of our internal growth story, and the combined company will have the ability to increase those assets,” Ventas chief Cafaro, said on the call.

There is room for growth, according to Cafaro. Real estate investment trusts own less than 10% of the country’s roughly $700 billion in healthcare properties, she said.

Medical office buildings—a big push of Nationwide’s in recent years—are set to make up about 11% of the combined company’s portfolio.

In 2008, Nationwide spent over $900 million to buy 28 medical office buildings from San Diego-based Pacific Medical Buildings.

Integration

Nationwide is expected to be absorbed by Ventas.

Pasquale plans to stay on as a senior adviser through the transition and then assume a seat on Ventas’ board, which will expand to 13 members.

Cafaro is set to be chief executive of the combined company, which will be run from Ventas’ Chicago headquarters.

Nationwide has about 30 employees at its Newport Beach headquarters and 35 nationwide. How many stay on and whether Ventas will keep Nationwide’s Newport Beach office is unknown.

The combined company is expected to have a market value of about $17 billion, which would surpass rivals such as Long Beach-based HCP Inc., with a $13.5 billion market value at recent check, and Toledo, Ohio’s Health Care REIT Inc., at $7.5 billion.

Ventas’ expanded size could give it more buying power when it comes to debt, according to Mains.

“It’ll be a bigger company with a larger, more diversified portfolio and a stronger balance sheet, which the ratings agencies could look upon favorably and give a better credit rating,” he said.

Nationwide’s deal price includes about $1.7 billion of assumed debt. Excluding debt, the stock portion of the acquisition is valued at $5.7 billion, or 15% more than what Nationwide was worth before the deal was announced.

Institutional investors are set to see the biggest payday in the deal. Amsterdam’s ING Group NV, Pennsylvania’s Vanguard Group Inc. and New York-based BlackRock Inc. own the biggest chucks of Nationwide at a combined stake of about 20%.

Pasquale’s stake in the deal is worth about $14 million, before factoring costs he’s incurred to exercise stock options.

Nationwide’s board includes Richard Gilchrist, president of Irvine Company’s investment properties group who holds a small stake in the company worth about $200,000 in the buyout.

Other Interest

One analyst speculated the deal might draw interest in Nationwide from other healthcare real estate investors, including HCP, which previously was based in Newport Beach.

“We wouldn’t be surprised if this gets a few third parties interested,” said Richard Anderson of Bank of Montreal’s BMO Capital Markets.

Another analyst brushed off the prospect of a rival bid.

“We view the likelihood of a competing bid as low,” Daniel Cooney, an analyst with Keefe, Bruyette & Woods in New York, wrote in a client note.

Nationwide also seems to have settled on Ventas, according to Cooney.

“The company undertook a thorough eight-month review process to identify the best strategic partner in the current environment, which, in our opinion, suggests (Nationwide) would require a significant price premium before they considered another offer,” he said.

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