CAMP HILL, Pa. - Where others might see a nursing home industry in trouble, Trans Healthcare Inc. sees an opportunity.
That's what lured THI to the bankrupt Sparks-based Integrated Health Services Inc., which it has agreed to buy in a deal valued at $327.5 million. Assuming that the sale wins approval in U.S. Bankruptcy Court, THI will move its headquarters to IHS' Sparks campus, retaining the 675-person work force there.
The acquisition would roughly triple Trans Healthcare's size, making it a significant player in the industry and a major presence in the Baltimore area.
Navigating troubled waters is nothing new for Camp Hill, Pa.-based THI. The company was started in 1998 to capitalize on industry upheaval after Medicare sharply cut payments to nursing homes, plunging several large long-term care chains into bankruptcy.
"It was a contrarian investment," said Anthony Misitano, THI's chief executive officer. "We thought there were going to be buying opportunities."
THI began buying small groups of nursing homes, building up to its current 94, including nine in Maryland.
In the interim, the industry began to recover after Congress adopted a temporary increase in rates, and all of the companies except IHS emerged from bankruptcy. But the temporary increase expired in October, and payments again fell. One major chain recently declared bankruptcy.
Again THI made a contrarian move, signing the deal to buy IHS' leases and management contracts for $97.5 million in cash and the assumption of $230 million in liabilities. With IHS, Trans Healthcare would have 274 nursing homes in 26 states.
"Going national for nursing homes is not the trend," said Stephen Monroe, editor of the trade publication SeniorCare Investor. "It's a bad market. Why would you want to more than double your size?"
Most nursing homes deals now, Monroe continued, are "onesies-twosies," mom-and-pop operators selling single or small groups of homes to medium-size, regional companies.
For example, Eldersburg-based Nexion Health Inc., which is buying nursing homes, is pursuing a strategy of moderate growth and geographic focus. Currently it has 44 nursing homes and wants to be in the 50-to-70 range, concentrated in Texas and Louisiana.
"There are selective opportunities for expansion," said Francis P. Kirley, Nexion CEO and a former IHS executive. "Economies happen when you have regionalization."
To Misitano, however, the chance to go big and national with the Integrated deal is coming about because of "a match made in heaven."
IHS offers the company the infrastructure - THI needed a new computer system, for example - staff and space to operate a national company, which THI has wanted to do from the beginning.
"That's one of the really compelling aspects of the IHS transaction," Misitano said. "The work force is in place. We'll be able to continue to grow the company. What we're inheriting will be enough to service what we acquire."
IHS' Sparks location is another plus. Misitano said he plans to move to Maryland eventually. But for now, with a 9-year-old daughter who's happy in school, it's a manageable 50-minute commute from THI's current location near Harrisburg, Pa.
The deal would bring Misitano and other THI executives a set of facilities they've run before.
More than one-third of Integrated's 180 nursing homes were once owned by Continental Medical Systems Inc., where Misitano previously worked. Misitano stayed on after CMS was sold in 1995, but left after the successor, Horizon/CMS, was sold two years later. The company that bought Horizon/CMS immediately sold large chunks of the business, including many former CMS properties, to Integrated. Misitano left to start his own company, taking a half-dozen or so others with him.
Rocco A. Ortenzio, a CMS co-founder, also started another company then.
For funding, both turned to Chicago venture capital firm GTCR Golder Rauner LLC.
"We had made a lot of money with Rocky and Tony [on CMS]," said Ned Jannotta Jr., a principal at GTCR. So GTCR put up money to launch Ortenzio's new company - Select Medical Corp., which went public in 2001 - and THI, in which it continues to hold a stake.
THI's launch to acquire nursing homes appealed to GTCR "because a new prospective payment system for Medicare was just being implemented," Jannotta said.
"We thought it would create a lot of distress, and there would be a decline in multiples for assets and a decline in buyers for those assets."
Enthusiasm for deal
And Jannotta is confident that the IHS deal will be a winner.
"The biggest attraction is that our management team at THI has been exceedingly successful in improving the operating margins and the care level," he said.
Since THI is privately held, its financial reports are not public. (It does say its revenue is more than $500 million.) Misitano said it has improved earnings at nursing homes it has taken over.
"We have seen an uptick in operating margins between 5 and 7 percent," he said.