Extendicare branches out, buying Assisted Living Concepts for $280m.

Extendicare Health Services Inc., one of the industry's largest nursing home providers, has decided to boost its profile in the assisted living sector by buying Assisted Living Concepts Inc., one of the nation's largest assisted living providers, for $280 million.

The deal, which Extendicare officials said they expect to complete by March, would turn the company into the industry's fifth-largest assisted living facility operator. The acquisition would give the company a capacity of nearly 8,900 residents from 218 facilities nationwide, according to data from the Assisted Living Federation of America.

Milwaukee-based Extendicare is the nation's 23rd-biggest assisted living provider, with a resident capacity of 2,055 and AL-related revenue of $38 million in 2003. Dallas-headquartered Assisted Living Concepts is No. 6 in the industry with a resident capacity of 6,838 and revenue of $168 million in 2003, according to ALFA.

While it's not among the biggest players in assisted living, Extendicare is the nursing home sector's ninth-largest provider, with nearly 15,000 beds from 154 facilities in 13 states, and revenue of $870 million in 2003, according to data from Verispan and Hoovers.com.

"We have been quite public for some time in saying that assisted living is an area of the business that we wanted to grow," said Chris Barnes, Extendicare's manager of investor relations. "Prior to this transaction, only 4 percent of our revenue came from assisted living. That's obviously going to change now."

Under the deal, Extendicare paid $132 million for the company and assumed $138 million of ALC's outstanding debt. Extendicare paid for part of the transaction through a $66.8 million dividend issued by Crown Life Insurance Co. in early December. Extendicare holds a nearly 35 percent interest in the Canadian company, according to Barnes.

The ALC deal was Extendicare's largest transaction since at least 1998, Barnes said.

Officials from Assisted Living Concepts could not be reached for comment before deadline.

According to Barnes, Extendicare saw an opportunity it couldn't pass up when Assisted Living officials put the company up for sale in July, 2004.

Launched by Portland State University gerontology professor Keren Brown Wilson in 1994, Assisted Living Concepts was the first public company in the nation to provide assisted living services to moderate-income elderly in rural and suburban American communities, according to company literature. Within four years, the company grew from five facilities to 180 nationwide. ALC has attributed its success to jump-starting the assisted living industry in the mid 1990s, according to published reports.

But ALC ran into financial difficulties at the end of the decade and filed for Ch. 11 bankruptcy in October 2001. It emerged from Ch. 11 in January 2002, the same month former Alterra Healthcare Corp. head Steven Vick became ALC's president and chief executive officer.

UnderVick, the company began a moderate turnaround, raising annual revenues from $150 million in fiscal 2001 to $168 million in fiscal 2003. The company achieved its best financial results in second quarter of 2004, according to Vick in an August 2003 press release.

In July, ALC decided to "maximize shareholder value" and sell the company, which Barnes called a perfect fit with Extendicare's operations.

"They have 177 facilities, 120 of which are operating in states where we already have existing operations," Barnes explained. "These are markets we already understand. And both of us tend to operate in smaller towns, so there's some common ground there as well."

Assisted Living Concepts has facilities in Oregon, Washington, Idaho, Nebraska, Iowa, Arizona, Texas, New Jersey, Ohio, Pennsylvania, Indiana, Louisiana, Michigan and South Carolina. Extendicare offers assisted living services in Indiana, Kentucky, Minnesota, Ohio, Oregon, Pennsylvania, Texas, Washington and Wisconsin.

In a public statement, Mel Rhinelander, Extendicare's president and chief executive officer, said the ALC offerings "complement our existing nursing home business and provide a stable business environment, (one that is) less-reliant on government fiscal policy."

Barnes contrasted the nursing home business, where revenue generation is often tied to Medicare and Medicaid, to most of the assisted living industry, where private-pay is more common and can mean fewer revenue headaches for providers.

Still, some wonder if Extendicare paid too much for assisted living. Under the deal, Extendicare paid ALC shareholders $18.50 a share at a time when the company's stock hovered in the $14.50 to $15 range, according to CBS Marketwatch.com.

"At first blush, you have to congratulate (ALC President and CEO) Steven Vick for getting that high a price," said Stephen Monroe, a partner at New Canaan, Conn.-based Irving Levin Associates Inc., a financial analyst specializing in long term care industry mergers. "The question is whether Extendicare will be able to continue the turnaround and fill up (ALC's) facilities, and whether ALC really is the geographic synergy that Extendicare claims it is. To me, $18 a share seems expensive, but you never know."

Barnes said the company considers the price paid to be perfectly reasonable, noting that it breaks down to about $56,000 per unit--much less than it would cost to build them brand new. "That would be in the neighborhood of $100,000 each, so this was a very good deal," he said.

Movin' On Up

The Assisted Living industry's 10 largest providers,
ranked by resident capacity:

PROVIDER                                  CAPACITY

1. Sunrise Senior Living                   29,745
2. Alterra Healthcare Corp.                14,930
3. Atria Senior Living Group               14,517
4. Emeritus Assisted Living                14,423
5. Extendicare (pending merger approval)    8,893
6. Merrill Gardens                          7,877
7. Leisure Care                             4,516
8. Hearthstone Assisted Living              4,000
9. Lifetrust America Inc                    3,915
10. Southern Assisted Living Inc            3,293

Source: Assisted Living Federation of America 2004 Largest
Provider Survey