Manor Care, HCR forging huge chain of nursing homes $2.4 billion merger joins Gaithersburg and Ohio companies

Toledo gets headquarters

June 11, 1998|By M. William Salganik | M. William Salganik,SUN STAFF Bloomberg News contributed to this article.

Manor Care Inc. announced a $2.4 billion merger with Health Care and Retirement Corp. yesterday, forming one of the country's largest nursing home chains.

The new company will be called HCR Manor Care and will have headquarters in Toledo, Ohio, where HCR is based.

Stewart Bainum Jr., chairman and chief executive officer of Gaithersburg-based Manor Care, will be chairman of the new company, and the board will have five members each from the old Manor Care and HCR boards.

The CEO, chief operating officer and chief financial officer of HCR will assume those positions in the merged company.

"It's a merger from the strategic point of view, but it appears as though HCR got most of the top positions," said John Hindelong, an analyst at Donaldson Lufkin & Jenrette Securities Inc.

Manor Care employs 700 at its Gaithersburg headquarters. Leigh C. Comas, the company's vice president for finance, said about 200 are in development and operations and would remain in place.

Some of the remaining 500 jobs will stay as well, she said, but it's not yet decided how many or which jobs would move to Ohio.

The merger, expected to close by the end of the year, would create a company with 295 nursing homes, 76 outpatient therapy clinics, 116 rehabilitation centers and 47 assisted-care facilities in 32 states.

HCR Manor Care will have about 50,000 employees. It will have a market capitalization of $4 billion, debt of less than $1 billion and annual revenue of $2.4 billion.

"This financial strength will enable us to take advantage of greater expansion opportunities, both through an aggressive internal facilities development program and through future acquisitions, at the lowest cost of capital in the industry," Bainum said.

Manor Care has already announced plans to develop 200 assisted-living facilities in the next five years.

Assisted living -- in which residents receive some help with daily living, but not full nursing care -- is an area of growing strength for Manor Care, and one of the "hot developments" in the long-term care industry, said Joshua Wiener, a researcher at the Urban Institute in Washington who follows long-term care issues.

In fact, the deal "shows the raised profile of assisted living," Hindelong said. Manor Care was attractive to HCR, he continued, because "Manor Care brings to the table a significant platform" in assisted living. As the population ages, the assisted living market is growing at a rate of about 30 per cent a year.

Subacute care

The other important development in long-term case, Wiener said, is subacute care -- care that is more intensive than that provided by a traditional nursing home but less than provided by a hospital.

It is increasingly used as a way to shorten hospital stays by moving patients to less-costly subacute facilities for some of their rehabilitation.

This is an area where HCR is strong," Comas said. "They've done more on subacute and rehab, and it's a chance for us to learn."

Aside from their different strengths in those two areas, "both companies are very similar regarding their corporate philosophy and culture," Hindelong said. Both have many facilities in upper-income communities and aim for private-pay patients. Wiener said private patients typically pay 15 percent to 30

FTC percent more than Medicaid rates.

Combined, the two have 51 percent private-pay patients and 28 percent Medicaid. Wiener said the industry average is 68 percent Medicaid and 22 percent private.

Hindelong said size can produce efficiencies which are important as Medicare and Medicaid are changing reimbursement systems.

"Standing still is just not an option, given the changes the industry is undergoing," he said. "The old game plans are insufficient."

Comas said the new company expected to grow more, building new facilities where it can but acquiring other long-term care operators in the many markets where it is difficult to obtain certificates of need to build.

She said the merger is expected to produce $30 million in savings the first year. Making the deal attractive, she said, is the fact that 91 percent of HCR's facilities are in states where Manor Care operates, so the companies can combine functions "at the cluster market level" such as marketing, purchasing and claims processing.

No closings planned

There are no plans to close nursing homes, she said, since both companies have current occupancy rates near 90 percent.

Comas also predicted benefits on the revenue side. For example, she said, 17 percent of Manor Care's beds are devoted to Alzheimer's disease patients, and HCR "can roll this out in their facilities." Alzheimer's units, she said, are more profitable than are regular skilled nursing units because they attract more private-pay patients.

Under the deal, Manor Care stockholders will receive one share of HCR for each Manor Care share they own. Manor Care closed yesterday at $35.5625, up $4.5625 for the day. HCR shares slipped 62.5 cents to $37.125.

At that closing price for HCR, the deal values Manor Care at $2.4 billion. Manor Care stockholders will end up with 58 percent of the combined company.

Stockholders of both companies still need to vote on the deal. The Bainum family owns 31 percent of Manor Care.

Manor Care said it is dropping plans to split the company into two, one to build facilities and the other to operate them.

Stewart Bainum, father of the current chairman, entered the nursing home business in 1959 and formed Manor Care in 1968. In 1980, Bainum merged his Quality Inn hotel chain into Manor Care. The hotels were spun off in 1996 as Choice Hotels International Inc.

HCR was set up by Ormond in 1991 to buy the health-care businesses of Owens-Illinois Inc. Since then, the company has expanded through acquisitions and partnerships and has opened new facilities.

Pub Date: 6/11/98

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