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HCP Invites $34 Billion Merger as Valuation Nears Low: Real M&A
2014-03-26 00:03:03.421 GMT
(For a Real M&A column news alert: SALT REALMNA <GO>.)
By Brooke Sutherland
March 26 (Bloomberg) -- The timing may be right for a $34
billion merger between two of the biggest managers of U.S.
health-care facilities.
HCP Inc. is near its cheapest level since 2009, after it
lost its title as the largest health-care real estate investment
trust this year, according to data compiled by Bloomberg. The
stock slump amid a slowdown in deals and the firing of Chief
Executive Officer James F. Flaherty could spur Ventas Inc. or
Health Care REIT Inc., known as HCN, to weigh a bid for the $17
billion company, said Adelante Capital Management LLC. A
takeover by either would be the industry’s biggest deal ever.
Buying HCP could lower capital costs for future
acquisitions, though it also would make it harder to find deals
big enough to boost growth after that, said Stifel Financial
Corp. Ventas, the biggest of the three REITs, may have more
financial flexibility for a takeover than HCN, said Bahl &
Gaynor Investment Counsel Inc. While no deal is imminent,
investors may start encouraging HCP to explore a sale if its
performance doesn’t improve after a year, said Bank of Montreal.
The valuation has “been deteriorating,” Jeung Hyun, a
fund manager at Oakland, California-based Adelante Capital,
which oversees about $1.8 billion including shares of HCP and
Ventas, said in a phone interview. “It’s a reasonable time for
the other two health-care companies to take a look at it.”
Dropped Talks
HCP had talks with Ventas about a possible deal late last
year, said a person familiar with the matter. The deal fell
apart after Flaherty left the CEO job, said the person, who
asked not to be identified because the discussions were private.
Lauralee Martin took over for Flaherty, who was fired
because HCP’s board lost confidence in his “leadership and his
leadership style,” the nursing-home owner said Oct. 3.
Representatives for Long Beach, California-based HCP didn’t
respond to requests for comment. Lori Wittman of Chicago-based
Ventas and Zachary Ottenstein of Toledo, Ohio-based HCN said
their companies don’t comment on market speculation.
Shares of most health-care REITs have fallen in the last 12
months on prospects for higher interest rates. While HCN dropped
12 percent and Ventas slipped 16 percent, HCP plunged 24
percent.
Deal Dearth
The laggard performance by HCP is tied to investor
uncertainty about the company’s direction after the abrupt
management change and a dearth of dealmaking, said Michael
Carroll, an analyst at Royal Bank of Canada. HCP hasn’t spent a
dollar on acquisitions since buying 133 senior housing
communities for $1.7 billion in October 2012, according to data
based on reported deals compiled by Bloomberg.
Martin is still somewhat of an unknown for shareholders,
who are waiting to see how she will make her mark on HCP, said
Rich Anderson, a New York-based analyst at BMO.
If about a year goes by without any meaningful deals or
internal improvements that lift the stock, investors may “start
asking the question, ‘Why don’t you sell yourself?’” Anderson
said in a phone interview. “As big as these companies get,
nothing surprises us in terms of what the next step could be,
and I can’t say I’d be terribly surprised if one of these
humongous companies got twice as big.”
HCP last week was valued at 14.84 times its earnings before
interest, taxes, depreciation and amortization, not far from its
lowest valuation since July 2009, according to data compiled by
Bloomberg. The company also has the cheapest price-earnings
multiple among 11 U.S. health-care REITs valued at more than $1
billion, the data show.
Good Timing
“This probably is a more likely time than normal for a
merger to happen,” John Leslie, a money manager and analyst at
Miller/Howard Investments Inc., said in a phone interview. While
he said a deal may never materialize, if HCN or Ventas have any
interest in HCP, “now is probably the time” to strike.
Miller/Howard, based in Woodstock, New York, oversees about
$6.7 billion, including shares of HCP, HCN and Ventas, according
to Leslie.
Should HCN or Ventas merge with HCP, the combined company
would be valued at about $34 billion, based on yesterday’s
closing stock prices. HCN’s market capitalization is $17 billion
and Ventas’s is closer to $18 billion, data compiled by
Bloomberg show.
The largest health-care REIT deal on record was Ventas’s
acquisition of Nationwide Health Properties Inc. for about $7
billion, according to data compiled by Bloomberg.
‘Very Large’
“They’re all very large so a merger between any two of the
three would create a very, very large REIT,” Stephanie Thomas,
a fund manager at Cincinnati-based Bahl & Gaynor, which oversees
about $11 billion including shares of HCP, HCN and Ventas, said
in a phone interview.
Ventas’s debt is 0.53 times its market capitalization,
compared with HCN’s ratio of 0.63, data compiled by Bloomberg
show. That may give Ventas more financial flexibility than HCN,
Thomas said.
The appeal of a merger with HCP for either would be the
opportunity to reduce capital costs, said Rob Mains, a Saratoga
Springs, New York-based analyst at Stifel.
A transaction would also create barriers to finding
potential future deals, which are needed to fuel earnings
growth, he added.
“It’s been tough for all three of the big health-care
REITs to do a lot of M&A over the last year or so,” the analyst
said. “If they were to double in size, then they would have to
do double the amount of acquisitions to sustain the same
percentage growth.”
Strategic Fit
HCN also may not be interested in a deal because it has
been working to reduce its exposure to skilled nursing
facilities, said Carroll of RBC. Buying HCP would move it in the
opposite direction, he said. Any deal would also have to gain
regulatory approval and pass antitrust tests.
Even though HCN and Ventas have been more acquisitive than
HCP, they still face pressure to do deals. That’s particularly
true because they probably missed out on senior-housing operator
Emeritus Corp., which agreed to sell itself to Brookdale Senior
Living Inc. last month, said Hyun of Adelante Capital.
“This was one of the first times where a big deal kind of
got away from the REITs, so I think there’s additional pressure
on the REITs to do something bigger, to show that they can still
acquire, they can still use their currency to do accretive
transactions,” Hyun said.
While doubling in size may make it harder to find
meaningful deals later, “you dance until the music stops,” he
said. “As long as it’s accretive and as long as the companies
are getting rewarded for growth, I think they have to do it.”
For Related News and Information:
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--With assistance from David Welch in New York.
To contact the reporter on this story:
Brooke Sutherland in New York at +1-212-617-0448 or
bsutherland7@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
Whitney Kisling