Undone deal hurts YSI stock Failure to acquire Three Springs Inc. causes price drop

June 29, 1996|By Alec Matthew Klein | Alec Matthew Klein,SUN STAFF

Wall Street reacted with immediate disapproval to Youth Services International's announcement yesterday that it was pulling out of a deal to acquire Three Springs Inc., a Huntsville, Ala., operator of programs for emotionally troubled adolescents.

After the deal fell through, the stock of publicly traded Owings Mills-based Youth Services International Inc. dropped more than percent, closing at $17.75, down $2.50. Little more than two months ago, Wall Street pumped up Youth Services' stock by 14 percent on the news that the national operator of juvenile delinquent centers would boost revenues by more than a third with the acquisition of Three Springs.

"I think the stock got ahead of itself," said analyst Edward A. Froelich of Pershing & Co. in New Jersey.

Fast-growing Youth Services, aware of Wall Street's short-term outlook, nonetheless withdrew from the deal after reviewing Three Springs' finances and considering its own long-term objectives.

"We did the due diligence, and programmatically [Three Springs] would have been a good fit; however, their earnings expectations did not meet our expectations," said Joan Stephens, Youth Services' vice president of corporate relations. "So it was certainly in the best financial interests of our shareholders to terminate the agreement."

Under a signed letter of intent, Youth Services, operator of 19 residential and community-based programs for some 4,000 youths in 11 states, had agreed to buy Three Springs for 800,000 shares of Youth Services stock, worth about $27 million when the agreement was announced April 16.

Financial analysts hailed the deal then and the potential profits expected almost immediately from Three Springs, which operates 13 centers across the Southeast and is best known for its "therapeutic wilderness" program.

Youth Services, which earned $2.2 million on $53.1 million in revenue for the year ended June 1995, was expected to add another $20 million in revenue from the Three Springs deal. Earnings, however, were a larger concern.

"We're a private company, and while I understand that a publicly traded company is focused on earnings, we may make decisions in the short term that don't make our balance sheet look good," said Mike Watson, president of Three Springs, which is about 20 miles south of the Tennessee border.

Despite their differences, Watson said, Youth Services "dealt with us in good faith," and he did not rule out the prospect that the two sides could reach an agreement one day.

Pub Date: 6/29/96

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