Wednesday, October 31, 2007

Fun Facts about The Carlyle Group's Purchase of Manor Care

While the media and government regulators ignore Carlyle's history of abandoning long term acute care patients in times of disaster, other fun facts are coming to light. But before illuminating other interesting tidbits, I'll drive home the first point:

1) The Carlyle Group's LifeCare Hospitals had the largest number of patient deaths post-Katrina and George W. Bush didn't find this noteworthy enough to put in his Lessons Learned report. Regulators and elected officials mostly ignore this failure to acutely ill patients in a time of crisis. None have challenged LifeCare's defense which blames the federal government for up to 24 wrongful deaths occurring on their watch. One Florida official finally raised the question in his opinion piece in the St. Petersburg Times just yesterday.

2) Gail Wilensky, the ex-Medicare/Medicaid chief under George H.W. Bush, will pocket $790,000 in options and stock appreciation rights from the sale of Manor Care. Her 27,205 shares of owned stock at $67 per share bring her total take to $2.6 million. Her capital gains tax savings due to Bush Jr.'s tax cut could amount to $130,000. Note that over two thirds of Manor Care's 2006 revenue came from Medicare and Medicaid, Gail's prior responsibility. (Ms. Wilensky is also a director of Cephalon, Inc.; Gentiva Health Services, Inc.; Quest Diagnostics Incorporated; SRA International; and United HealthCare Corporation.)

3) Manor Care CEO Paul Ormond will gross $83.8 million in option and other stock compensation from the sale of his company. His direct stock holdings add another $245 million, bringing his total take to roughly $330 million. His Bush tax savings amount to over $16.5 million.

4) The nursing home company had a $167 million profit last year and paid Uncle Sam $97 million in income taxes. Interest expense amounted to $31.5 million.

5) Debt to finance the purchase includes $4.6 billion through a CMBS facility. Manor Care's debt rating dropped to "B" status. This translates to a higher interest rate, especially in this credit conscious environment.* The prospectus states a maximum 6%. Interest expense on $4.6 billion at 6% is $276 million. This alone wipes out Manor Care's annual profit and potentially eliminates its federal tax obligation.

6) Carlyle will invest $1.3 billion of their funds in equity financing. This is only obligated through the closing date and can be turned into debt afterwards, should the firm desire.

7) The private equity firm will also take out a $900 million in senior secured credit facilities. The prospectus states it will be at the same interest rate as the CMBS debt. This adds another $54 million in debt to the firm's income statement, bringing the total new interest expense to $330 million.

8) Using its 2006 income statement and the new $330 million in interest expense, Manor Care would need to cut expenses some $30 million company wide to break even. They would pay nothing in income taxes to the federal government despite getting two thirds of their revenue from that same source via Medicare and Medicaid.

9) The Carlyle Group plans to split the company in at least two parts and as many as 1,100 as it segregates operations from real estate in its 550 facilities. This is done to segregate assets for legal liability, like the wrongful death lawsuits LifeCare faces after Hurricane Katrina!

What goes around, comes around and this PEU has the distinct odor of fetid financial flood waters. Rising tides don't lift all beds, something Carlyle should know acutely.

*(From Investment Dealer's Digest: As a result of the widening in yield premiums, borrowers face higher costs. "What happens is the rate we charge borrowers is directly related to where we can clear bonds," says Pendergast. "Investment grade spreads are wider and the yield on the B piece required by buyers is much higher." While the B piece is a small part of a CMBS deal, finding a buyer for it is key to a transaction. The yield demanded by the buyer of the B piece will determine the cost effectiveness of the whole securitization process. "Overall, lenders are charging more to clear the new spreads charged by investors," says Michael Higgins, head of real estate finance at CIBC World Markets.)