The nursing home industry’s made enough of a comeback in recent years to spur Foothill Ranch-based SHG Holding Solutions Inc. to test the waters on Wall Street.
Last week, SHG filed plans with the Securities and Exchange Commission to go public in an offering that could raise up to $175 million, which would be the biggest public offering for Orange County since early 2005.
SHG runs Skilled Healthcare Group, which has more than 70 nursing and assisted living homes in California and four other states.
Six are in OC, including Alta Care Center in Garden Grove; Carehouse Healthcare Center in Santa Ana; and St. Elizabeth Healthcare and Rehabilitation Center in Fullerton.
Toronto-based investor Onex Corp. bought Skilled Healthcare for about $645 million in late 2005. After the offering, Onex still is set to own a majority of SHG, according to its registration statement with the SEC.
The company declined an interview in the run-up to the proposed public offering, a date for which hasn’t been set yet.
SHG’s proposed offering is sizable by OC standards of late.
So far this year, the county’s largest local public offering was by Newport Beach-based Acquicor Technology Inc., which raised $173 million in March.
In the past two years, the largest local public offerings came by way of San Clemente’s Sunstone Hotel Investors Inc., which raised $360 million in late 2004, and Irvine’s ECC Capital Corp, which raised $354 million in early 2005.
SHG is betting investors will warm to it with a comeback for nursing homes.
Back in the late 1990s, the sector went through turmoil. At one time, five of the top seven operators sought refuge in bankruptcy court.
The Balanced Budget Act of 1997 dealt nursing home operators heavy cuts in federal funding.
Sun Healthcare Group Inc. of Irvine was one of those that sought cover in bankruptcy court, undergoing what Chief Executive Richard Matros called “a major restructuring.”
Ironically, the company has benefited by getting a bigger piece of business from Medicare, which typically pays more than private payers, Matros said.
Sun counted a recent market value of $360 million, up 65% from the start of the year. The company is much larger than SHG with 155 skilled nursing facilities and yearly sales of about $1 billion.
Through June, SHG had sales of $256 million, up 16% from the year-ago period. The company is profitable, albeit slightly, with $7 million in net income through June.
Which is why SHG is going public.
In the company’s filing, SHG said it expects to use the proceeds of its offering to pay down debt. Interest payments are hamstringing SHG’s profitability,without them, the company made $35 million in operating profit through June.
SHG had about $450 million in long-term debt as of June 30.
Like Sun, SHG has gone after more Medicare business.
Nearly 70% of SHG’s revenue through June was from Medicare and Medicaid for the poor.
Reliance on Medicare has its risks. The Bush administration has taken aim at the growth of Medicare spending and could seek cuts before its time is up in 2008.
In SHG’s filing, the company warns of the prospect of possible cuts in federal funding.
“Prior reductions in governmental reimbursement rates partially contributed to our bankruptcy filing” in 2001, SHG said.
The company, which has 6,700 workers, is led by Chief Executive Boyd Hendrickson, who has been with the company since its days as Fountain View Inc.
Hendrickson’s background also includes serving as president and chief operating officer of Beverly Enterprises Inc., one of the country’s larger long-term healthcare providers.
Besides reimbursement cuts, Fountain View was hit with a $6.1 million jury award in a negligence case a few years back.
A California jury found the company negligent in its care of a 65-year-old woman who died in 1998 after surgery to remove a blood clot. The company eventually settled the case for $1.1 million.
Two years later, Fountain View emerged from bankruptcy and changed its name to Skilled Healthcare.
Heritage Partners Inc., a Boston investment firm that owned half of the company prior to the bankruptcy, ended up with 80% of the reorganized company.
In 2005, Heritage Partners hired Credit Suisse First Boston to look at options for Skilled Healthcare. An initial public offering was considered before the company was bought by Onex.
