Sun-Genesis Healthcare Merger to Close


Recently, shareholders of healthcare services company, Sun Healthcare Group, Inc. (SUNH) voted in favor of the company’s previously announced merger with Genesis HealthCare, a Delaware-based limited liability company. Closing of the transaction, which is subject to certain customary conditions, is expected to be by late fall 2012.

In order to strengthen its core business line while providing best patient care even amid several ongoing headwinds in the healthcare industry, Sun Healthcare, in June this year, entered into a definitive agreement to be acquired by Genesis. Per the deal, Genesis will acquire Sun Healthcare for $8.50 per share, in cash, for a total transaction price of $275 million net of cash and debt acquired.

This transaction price represented a 43.1% premium on the closing price of Sun Healthcare on June 19 (the day before the announcement) and a 55.6% premium to the volume-weighted average closing price of $5.46 during the previous 30 trading days.

Sun Healthcare expects that the successful completion of this transaction will enable the combined entity to ensure a broader geographic reach and help meet the essential scale to remain competitive in the post-acute care sector.On a combined basis, the two companies generated roughly $4 billion in revenue in 2011 and will have more than 420 facilities and 75,000 employees.

Sun Healthcare is a healthcare services company, serving principally the senior population, with annual revenues in excess of $1.9 billion in fiscal 2011 and approximately 28,000 employees in 46 states. The subsidiaries are providers of nursing, rehabilitative and related specialty healthcare services primarily to the senior population in the U.S. They also provide hospice services, rehabilitation therapy services and temporary medical staffing services to skilled nursing centers.

As of June 30, 2012, the company’s core business was to provide in-patient services, primarily through 158 skilled nursing centers, 13 combined skilled nursing, assisted and independent living centers, 10 assisted living centers, 2 independent living centers and 7 mental health centers with 21,349 licensed beds located in 23 states.

Sun Healthcare suffered several setbacks over the past few quarters mainly due to declining Medicare rates as mandated by the Centers for Medicare and Medicaid Services (CMS). As per the final rule implemented on October 1, 2011, CMS reduced Medicare part A payment rates by approximately 12.6%.

Added to this, the federal and state governments are currently adopting numerous initiatives for comprehensive reforms affecting the payment for and availability of healthcare services. All these could further reduce funding of the Medicare and Medicaid programs thereby increasing pressure for the company.  Apart from this, the macro-economic downturn and competitive pricing pressure are also impacting Sun Healthcare’s business.

However, Sun Healthcare remains a lucrative acquisition target due to its high-quality portfolio and core inpatient  services business. Moreover, Sun Healthcare’s stock price is much cheaper relative to its peers. We believe that with improved strategic interference, the Genesis consortium will be able to rejuvenate the business going forward.

Currently, we are Neutral on Sun Healthcare. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

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