"Analysis We view the management change as a natural progression of the integration changes currently in process at Brookdale. We note that Bill Sheriff joined the company as part of Brookdale’s acquisition of American Retirement Corp. in 2006. Since that time Mr. Sheriff has been integral in expanding the company’s ancillary revenue business across platforms to the Brookdale legacy portfolio, which should be completed in 2008. Also, he has helped to provide insight and leadership in consolidating prior year acquisitions, including an integrated systems roll out, which should begin to bear fruit in the form of incremental cost savings in 2008.
Implications We expect the announcement to have a modestly positive impact on the shares, as we believe this provides clearer leadership within the firm. We believe Bill Sheriff is a talented leader who has significant experience totaling 23 years in the industry. After speaking with management, we believe Brookdale will remain focused on its strategy of improving internal operations and expanding the company’s ancillary revenue business in 2008. That said, investors remained concerned about the risk of a potential dividend cut should cash flow growth moderate. We believe Brookdale’s $2.00 dividend is safe given our current expectations for cash flow growth in 2008 of ~25%. While management refrained from providing information on this topic in our conversations, we will look for additional color on the company’s 4Q2007 earnings call on February 28, 2008."
I don't think it's a shock to large investors--the Co-CEO arrangement was not meant to be permanent. Most checks have shown that Sheriff would be the stronger sole CEO. The major concern is that he is older and may be closer to retirement. Here's some thoughts from Frank Morgan at Jefferies:
"• Management change is part of a "natural evolution." While somewhat surprised by the timing of the announcement, we believe it was unlikely that the company would operate with two CEOs for the long-term. Given the challenges that the company faced related to the integration of Brookdale and American Retirement, we believe the company needed the two separate skill sets brought to the table by Messrs. Schulte and Sheriff.
• Announcement serves as a signal that integration is largely complete. We believe today's announcement signals that the major/disruptive challenges of the integration is behind the company and management is near the end of streamlining operations. Recall that on October 9, 2007, the company appointed John P. Rijos to the position of COO effective January 1, 2008, previously serving as the company's Co-President.
• Sheriff the obvious choice, in our opinion. Given where the company is and the industry headwinds facing the company, we believe Mr. Sheriff's operational and financial expertise is the most necessary skill set for the company going forward. We do not believe that this announcement serves as a signal of anything incrementally with regard to the state of the business."