More than a few heads were scratched when Carlyle Group announced plans to spend $6.3 billion for HCR Manor Care Inc.
Among the questions asked:
• Is the purchase a stroke of genius, or will Carlyle Group become another outside bidder burned by a business it doesn’t understand?
• Will the usual squeeze-and-sell impulse override the opportunity to create a long-term juggernaut?
• Is the trend of private-equity firms scooping up chains ultimately going to help or hurt long-term care?
Unfortunately, it may be years before we get some definitive answers.
What is known is that eldercare companies are being picked off this year faster than cicadas.
In the spend-money-to-make-money world of private equity, the Manor Care acquisition probably was not too difficult to justify.
More than 60 million baby boomers are about to retire. As nearly half may eventually require some nursing home care, buying a business that meets that growing need is a no-brainer.
Then there are two unique advantages that the Manor Care delivers. First, the firm boasts a very solid reputation. It would not be terribly difficult for a savvy investor to position Manor Care as the Ritz Carlton of eldercare services. By offering high-end services at commensurate prices, the new owners just might land a windfall.
Second, Manor Care owns all its real estate. That could allow Carlyle Group to borrow against the company’s 340 facilities at favorable rates and then use the funds to improve facilities, make better hires and upgrade services.
It would also make it easy for new owners to divide the new asset into real estate and service buckets.
But while healthcare is one of seven investments areas that Carlyle specializes in, it’s also one in which the company has relatively little experience.
It remains to be seen whether Carlyle will truly invest in this newly acquired asset, or act like a typical private-equity firm.
Should the second scenario prevail, we can expect to see aggressive cost-cutting, including layoffs. Those are the kinds of moves that have landed many other nursing home companies in hot water with regulators and consumers.
It’s also possible that Manor Care will be back on the block within five years or so. An even bigger sale in half a decade will be good for the lawyers, accountants and top management people who are in on the deal.
But let’s not forget what usually happens in this sector when unfettered greed overcomes business fundamentals. It ain’t pretty.
John O’Connor is the Vice President, McKnight’s Long-Term Care News. Contact him at
[email protected].
