Brookdale-Emeritus Merger Averted REIT Mega-Deal

Brookdale Senior Living’s (NYSE:BKD) acquisition of Emeritus Corp. (NYSE:ESC) may have averted a mega-merger between two real estate investment trusts (REITs) also vying to acquire the combined company, according to a proxy statement on the merger released Friday.

Prior to the February merger announcement with Brookdale, Emeritus entertained four potential buyers in August 2013 believed to be “interested in and capable of pursuing a transaction” and with “significant” capital resources and investments in portfolio companies in the senior living industry, the proxy stated.

Though only named as Company A, Company B and Company C in the statement, analysts have suggested the potential buyers likely included Health Care REIT (NYSE:HCN), HCP, Inc. (NYSE:HCP) or Ventas, Inc. (NYSE:VTR)—the only companies in the healthcare space that would meet the capital required to complete such a transaction.

Stifel analysts also suggested one of the companies to be a large private equity firm, in a report following the release of the statement.

Among the prospective buyers, at least two were interested in forming a joint venture to acquire the combined assets of the two companies and spinning off the operations into a single company, similar to a structure pursued by Sunrise Senior Living in its sale to Health Care REIT in 2012, albeit on a much larger scale when comparing Sunrise’s 290 communities to the 1,000-plus communities that will be under Brookdale command.

In April 2014, Revera, Inc. became the official majority owner of Sunrise’s management company.

Two days following the joint venture proposal, Emeritus’ Board of Directors communicated that it would not pursue the proposal.

Meanwhile, a third prospective buyer proposed a transaction in which Emeritus shareholders would own 54% of the combined company and receive a $6.25 per share cash dividend payable to shareholders. This proposal implied a value of $26.03 per share of Emeritus common stock, or an approximately 32% premium to Emeritus’ then-current stock price.

On December 22, a “best and final offer” was proposed by the buyer, revising its previous offer to $29 per share of Emeritus common stock, consisting of $7 in cash and Company B common stock having an implied value of $22 per share of Emeritus common stock. The deal represented a premium of 39.5% to the closing price of Emeritus common stock on December 20, 2013.

A proposal from Brookdale, however, contemplated a merger transaction that would give Emeritus shareholders one share of Brookdale common stock in exchange for each share of Emeritus common stock, at an implied value of $27.20 per share and a 30.8% premium on the closing price of Emeritus stock on December 20, 2013.

Brookdale’s proposal eventually won out and the companies to entered into exclusive negotiation, leading up to the merger agreement announced on February 20, 2014.

After 92 days of waiting, the proxy statement confirms the considerable amount of interest behind the acquisition of Emeritus—interest which may bode well for Brookdale down the road, analysts suggest.

“All in, we believe the publication of the proxy removes a layer of uncertainty from the closing of the transaction between the two companies,” stated Barclays in its report. “Additionally, the confirmed interest from outside parties will likely continue to serve as a potential future catalyst for Brookdale.”

Brookdale continues to expect the merger to close during the third quarter of 2014. When it does, Brookdale will become the largest senior living provider in the nation, totalling approximately 112,700 units in 1,161 communities across 46 states.

Written by Jason Oliva