OIG probe thwarts Centennial bid to go private.

The good news was that Centennial Healthcare Corporation's operating results for the fourth quarter of 1998 and its preliminary results for the first quarter of 1999 were in line with the company's expectations.

The bad news was that Welsh, Carson, Anderson & Stowe, the private equity investment firm which was supposed to take the company private in about 10 days, had just notified the Atlanta-based nursing home company that it was backing Out of the deal.

In a press release that paired Centennial's fiscal 1998 results with this recent setback, J. Stephen Eaton, president and CEO, made plain his disappointment with WCAS' change of heart.

"We are extremely disappointed in the actions taken by WCAS," he said.

Under the merger agreement, Centennial shareholders would have received $16 a share, almost double the average trading price at the time the deal was struck.

The reason given by WCAS was a pending investigation of Centennial by the Department of Health and Human Services, Office of Inspector General, relating to four of its facilities.

In a shareholder's conference call, Eaton bitterly recalled receiving a letter from WCAS explaining that it was terminating the merger because, if the OIG investigation proved negative, "it could be a 'material adverse event'--the only rationale available to them for termination."

More likely, he suggested, WCAS decided the $16 per share was more than it was willing to pay. The price, Eaton acknowledged, was "unique in the current environment given the valuation of postacute care companies."

Eaton left open the possibility of litigation against WCAS. "We're waiting to hear back from our attorneys on that," he said. "We're relying on good corporate counsel."

Industry observer Steve Monroe agrees that "as skilled nursing stocks started tanking, Welsh Carson might have been looking for an out."

Also interesting, notes Monroe, is what Centennial's relationship with Welsh Carson, which owns 23 percent of the company, is going to be like going forward. "I would think there'd be some frostiness," he says.

After receiving a letter subpoenaing records on four facilities and general corporate records on how Centennial allocates Medicare costs within a facility, Centennial staff met with DHHS officials. "There were no real allegations," said Eaton. "We wanted to find out the seriousness, focus, and scope of the investigation. I reached agreement with them in two areas--that the investigation would be focused on staff allocation and that the agency would do everything to expedite the investigation."