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What A Brookdale Sale Might Mean

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By Steve Moran

The air is hot and heavy with what appear to be very substantial rumors that Zhonghong Zhuoye Group Co Ltd, a Chinese real estate and leisure group that recently purchased a 21% stake in Seaworld, is very actively pursuing a purchase of Brookdale. According to rumors they have entered into an “exclusive negotiation” agreement at a price of 3 billion dollars.

The stock market apparently believes there is some substance with the share price jumping at one point to almost $1.50. I would note that I hold a tiny number of shares of Brookdale and that a sale at this price would reduce my hurt, but by only a tiny amount.

Questions

From the perspective of management and shareholders this rumored sale provides a resolution to a miserable situation. A transaction of this nature would require a number of federal government sign-offs and there is a fair amount of uncertainty about how the Feds will react to a Chinese company having this big a stake in something that is at least tangentially part of the US healthcare system.    

Options

While it is possible that new ownership would maintain existing leadership (something that frequently happens with Chinese investors) given the lackluster Brookdale performance this seems unlikely. This leaves the new ownership with two options:

  1. Installing New Management -- There is so much negativity about the idea that a large scale senior living organization can be effective this would seem to be the less likely of the two options. Though it is possible they have already identified someone who they feel is strong enough, charismatic enough to pull it off.  

  2. Dismantle and Sell the Parts -- This would seem to me to be the most likely way for them get substantial value from the transaction. There seems to be some evidence that the sum of the parts is way more valuable than the whole.  

    There are many options here. For several smaller companies based on geography or product types or just simply sell off the parts to the highest bidders. It might even be possible they would sell big chunks of the company and keep a core number of high performing buildings. There are also substantial implications for the REITs that own a big percentage of the assets. I can see some scenarios where a new entity would simply hand the keys of the poorest performers back to the REITs with a “God bless you, good luck” good bye. 

Impact

If new management is installed, in the short term it will have very little impact on the industry. However, if new management were to be successful in executing a turnaround, it could have a big impact.  

It is mind boggling to think about, but Brookdale has the equivalent of about 85-100 empty buildings in terms of bed capacity. A successful turnaround would, in some sense, be like popping something like 50-90 buildings out of the ground and into the marketplace without the usual development time. (It would never be 100 because of natural turnover.)  

Good News, Bad News

The bad news is that this represents the potential for stronger new competition. The good news is that as new communities compete aggressively, it tends to make the industry better at serving seniors and as this happens we should see an increase in market penetration.  

Your thoughts on what it all means?

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