Manor Care to spin off Choice Hotels It will concentrate on its growing health care business

Wall Street likes the move

'What they are doing is unlocking value in the lodging business'

March 08, 1996|By M. William Salganik | M. William Salganik,SUN STAFF

Manor Care Inc. said yesterday that it will spin off its lodging division in a separate company, allowing it to concentrate on its growing health care business.

"This gives us the ability to focus more intensely on each business," said Don Landry, president of Choice Hotels International, which will be spun off to stockholders in a tax-free transaction. "The businesses are completely different."

Initially, the businesses were combined "to create mass and borrowing capacity" when the company went public about 15 years ago, he said, but "both are now of sufficient size, cash flow and borrowing capacity to stand on their own."

The firm, with headquarters in Silver Spring, said the split will take six to eight months to accomplish. Holders of Manor Care stock will receive a proportionate amount of stock in Choice Hotels. For example, someone who owned 1 percent of Manor Care's 62 million outstanding shares would receive 1 percent of Choice Hotels stock.

Analysts praised the move, which had been expected, and the stock market reacted positively. Manor Care stock closed at $42, up $3, or 7.7 percent, for the day. "The breakup value is higher than the value of the combined company," said D. Scott Mackesy, an analyst with Dean Witter Reynolds in New York. "What they are doing is unlocking some of the value in the lodging business."

Although assets and debt remain to be allocated between the two companies, analysts estimated that Choice Hotels would be worth $650 million to $900 million.

While some investors "like a holding company strategy because of the diversification," more prefer a "pure play," where they can judge the risks and upside potential of a business in a single industry with "less moving parts," said Sheryl Skolnick, an analyst in the New York office of Robertson, Stephens & Co.

"I'm a health care analyst -- I look at lodging and I yawn. So they had an underappreciated asset on that side," said Joel M. Ray, an analyst with Wheat First Butcher Singer in Richmond.

Ms. Skolnick said both the lodging and health companies need capital to grow, and both would likely have better access to that capital after the split -- the health care company because it had less debt on its balance sheet, the lodging company because it would be easier to analyze.

The health care side has been producing about three-quarters of Manor Care's revenue -- $300 million for the quarter ended Nov. 30, compared with $95 million from hotels. The health division owns 197 nursing homes and other health facilities totaling 26,152 beds in 28 states. It also owns controlling interests in two other publicly traded health companies, Vitalink Pharmacy Services and In Home Health Inc.

Choice Hotels owns or franchises more than 3,600 hotels with 310,000 rooms open or under development in 30 countries. It operates under the brand names Quality, Comfort, Clarion, Sleep, Rodeway, Econo Lodge and MainStay Suites.

Stewart Bainum Jr., chairman and CEO of Manor Care, will hold the same title for the new hotel company. Most of the hotel firm's board members will come from the Manor Care board, including Stewart Bainum, father of the chairman. The elder Mr. Bainum founded the company in 1939 and, with his son, still controls it. But the hotel and health management teams have been separated over the past two years, Mr. Landry said -- not necessarily to pave the way for a spinoff but to bring management closer to the customer. He said the split will have no effect on employment at the Silver Spring headquarters, now about 1,000. The combined company has about 38,000 employees worldwide.

Mr. Landry, who has been president of the lodging division, will be president of Choice Hotels. Don Tomasso, who has been president of the health care division, will be president of Manor Care.

The lodging division has been buying properties aggressively in a depressed market -- it owned 11 hotels 3 1/2 years ago and has bought 53, Mr. Landry said.

The company has indicated that it would sell off most of these eventually. Mr. Landry said those plans were unaffected by the spinoff. "The plan has always been to monetize those hotel assets at some point, to take capital back out," he said. While the company is not selling hotels yet -- in fact, it is still buying -- it is possible it will start selling within six months and probable within two years, he said.

The split occurs at a time when the hotel business is rebounding from a slump -- and while spinoffs are gaining popularity on Wall Street. According to Bloomberg Business News, 18 such deals have been announced so far this year -- double the number in the same period last year.

Pub Date: 3/08/96

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