Manor Care hits snag

Regulators stall deal for sale to private firm

By GARY T. PAKULSKI
BLADE BUSINESS WRITER

THREE WEEKS after the sale of Toledo’s Manor Care Inc. was to have closed, the deal has been stalled by state regulators nationwide, and Wall Street is getting jittery.

In a sign that investors are worried that the $6.3 billion deal might not be completed, shares of the nation’s largest nursing home operator were trading last week nearly 9 percent below the $67 price at which they will be redeemed if the sale goes through.

“It’s worrisome,” said one analyst who spoke on the condition of anonymity. “The longer this thing takes to close, the more bad news may pop up.”

For the record, a spokesman at Manor Care’s downtown headquarters said it’s all systems go. “Our plan is still to close in the fourth quarter,” Rick Rump said. “We’re just still waiting for the approvals to come through. But it hasn’t changed our plans.”

The acquisition of the downtown Toledo company by the private equity firm Carlyle Group was planned to be completed by Nov. 7, but when that didn’t happen, the local business advised investors in a filing with the U.S. Securities and Exchange Commission that it “expects the closing of the merger to occur in the near term.”

The deal has been approved by Manor Care shareholders and the Federal Trade Commission.

Still, it is unclear whether the transaction will be completed by the adjusted target of Friday. A spokesman for Carlyle didn’t return a call seeking comment. But officials at the group’s Washington headquarters have given no indication that they are backing away from the deal negotiated last July.

If the investment firm walks away, it would have to pay Manor Care a $175 million penalty.

With $3.9 billion in annual sales, Manor Care operates 278 nursing homes and a similar number of assisted living facilities and other centers. It is one of the nation’s largest nursing-home operations and is the fourth-biggest firm in the Toledo area.

But roadblocks have been thrown up by a huge health care union and its allies in Washington and state capitals across the country.

Two congressional hearings were held this month on deals like the one at Manor Care; they involved the impact on care when nursing homes are sold to private-equity groups.

Critics of such deals say taxpayers have a major stake in the matter because they pick up the tab for most patients through Medicare and Medicaid.

U.S. Sens. Hillary Clinton (D., New York), who is seeking her party’s nomination for president, and Charles Grassley (R., Iowa) have asked the Government Accountability Office to investigate the issue.

Congressional observers expect no action this year, but witnesses suggested possible legislative responses to the sales that might not sit well with buyers. For example, one idea is to post financial responsibility bonds in situations where a seller separates a nursing home chain’s real estate — its primary assets — from operations.

Questions about licenses
A spokesman for the 1.9 million-member Service Employees International Union, which has led the attack, said the union isn’t trying to scuttle the sale.

But maneuvers by the union and its allies have raised questions about transfers of nursing home licenses in several states.

“We want to make sure the sale won’t hurt fragile nursing home residents,” said spokesman Julie Eisenhardt. “We don’t anticipate or expect delays.” But union actions contradict that.

Responding to an appeal, West Virginia last week imposed a stay on a certificate to allow Carlyle to take over seven homes.

Now, the state’s health care authority is expected to hold hearings and take testimony on the issue, said John Law, a spokesman for the West Virginia Department of Health and Human Services.

Also last week, Florida, where Manor Care has 28 nursing homes, demanded more information on seven. “Our review continues at this point,” said Fernando Senra, spokesman for the Florida Agency for Health Care Administration. Officials are considering a request for hearings on the issue.

The legislature in Wisconsin, where the Toledo firm operates eight nursing homes, has announced it will hold hearings as early as next week. Hearings also are planned in Illinois and Maryland and have been held in Pennsylvania, union officials said.

Ohio operates differently.

It won’t consider the request to transfer the operating licenses to Carlyle until the sale is completed, said spokesman Sara Mormon. The buyer would get a chance to fix problems found at individual homes, she added.

The Toledo company operates 43 nursing homes and nine assisted living facilities in the state. Most of its facilities nationwide operate under the names Heartland, ManorCare Health Services, and Arden Courts.

In Michigan, the state Department of Community Health is reviewing applications for license transfers for 28 homes. Rep. Kathy Angerer (D., Dundee), who has sought hearings on the deal in the Michigan House of Representatives, didn’t return calls seeking comment.

Manor Care operates nursing homes in 29 states, but it is unclear how many have approved license transfers.

In addition to actions on the legislative front, the union has descended on Carlyle headquarters in an attempt to deliver lists of demands.

Responding to the criticism, Carlyle has issued what it describes as a “patients first” pledge.

Carlyle and Manor Care offer a different explanation for actions by the service workers union. They contend the labor group is motivated by a desire to unionize the nursing home chain’s largely nonunion work force.

Union representation
The union represents about 1,000 of the firm’s 60,000 employees nationwide. The firm has 700 employees at its headquarters at 333 North Summit St. and 800 at facilities elsewhere in northwest Ohio.

Union officials cite a New York Times story and their own research contending that care suffers in nursing homes acquired by private equity groups.

Not only is the drive for profits greater in such firms, but companies they acquire are often bogged down with debt and shielded from the scrutiny to which public companies are subjected, critics contend.

Susan Feeney, a spokesman for the American Health Care Association, which lobbies for nursing homes, argues that the union exaggerates the extent of the problem.

Fewer than 10 percent of the nation’s 16,000 homes are owned by private-equity groups, she said.

And given the vast resources of these investment firms, they are often in a stronger position to pump money into homes that have been allowed to deteriorate because of declining government reimbursement formulas, she said.

Meanwhile, investors continue to closely monitor the situation.

“The union has pushed a multipronged strategy to delay and impede the acquisition of Manor Care by the Carlyle Group,” analyst James Kumpel, of FBR Research, wrote Nov. 15.

Citing those developments as well as indications that the buyers might be experiencing slight glitches in financing the deal in the current credit crunch, he downgraded the shares this month to the equivalent of hold from buy.

Another analyst, who spoke on condition of anonymity, said financing problems were unlikely to be a major issue in the deal.

Mr. Kumpel, of FBR Research, said investors who buy the shares at currently lower prices stand to make a premium given the planned sale, “which could occur in fairly short order.”