Could a Brookdale-Holiday Merger Follow $3.3 Billion Fortress Sale?

Fortress Investment Group (NYSE: FIG), the investment management firm behind Holiday Retirement and New Senior Investment Group (NYSE: SNR), will be acquired by Japanese technology giant SoftBank Group for about $3.3 billion in cash. The companies confirmed the deal late Tuesday, after The Wall Street Journal first reported on it.

The acquisition has sparked speculation about the potential for major—even industry-transforming—future plays in the senior housing space.

The Fortress transaction comes at a time when the senior housing sector already may seem ripe for big changes, as the largest provider in the nation, Brentwood, Tennessee-based Brookdale Senior Living (NYSE: BKD), is rumored to be in takeout talks with private equity behemoth The Blackstone Group.

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Fortress also has a formidable private equity arm, and it already has made major inroads in senior housing. It acquired Lake Oswego, Oregon-based Holiday, the largest independent living provider nationally, for about $6.9 billion in 2007. In 2014, New Senior launched as a publicly traded REIT externally managed by Fortress; its 154-property portfolio is dominated by Holiday properties.

With Brookdale seemingly in play for a takeover, one equity analyst who covers both New Senior and Brookdale thinks that a mega-mega-merger could be conceivable.

“What could be interesting is if Fortress with new SoftBank-driven capital would make a big play in the seniors housing industry by buying out Brookdale and combining that platform with Holiday,” Stifel analyst Chad Vanacore told Senior Housing News. “It would be a merger of the two largest seniors housing operators in the U.S.”

Such a scenario would be a return to Brookdale for Fortress, which co-founded the senior living company in 1995 and took it public in 2005. Fortress sold its remaining stake in Brookdale in 2014; Fortress Principal Wes Edens had stepped down as Brookdale’s Board Chairman two years earlier.

Another, less grandiose, idea put forward is that the Fortress acquisition might put New Senior in play to be snapped up, perhaps by Chicago-based Ventas Inc. (NYSE: VTR), one of the “big three” senior housing REITs. This possibility was suggested Wednesday by Forbes contributor Brad Thomas.

“Ventas already has a relationship with Holiday (26 properties) and it seems logical that the large cap REIT with the low-cost of capital advantage would find the latest Softbank deal opportunistic,” Thomas wrote. “New Senior is trading at a large discount with a portfolio well-suited for an ownership team armed with cash and credentials.”

Specifically, risks related to its outsize Holiday concentration, its external management structure, and its high leverage (typical of private equity enterprises) have caused New Senior shares to slide over the last two years, Thomas wrote. It is trading about 40% below the likes of Ventas and Welltower (NYSE: HCN).

While New Senior may appear an attractive acquisition target given where it’s trading, Ventas leaders did recently say they are putting the brakes on senior living investments in 2017, Thomas noted.

Holiday declined to comment for this article. Fortress and SoftBank had not responded to requests for comment as of press time.

Fortress Acquisition Details

Under the terms of the deal, Fortress will continue to be based in New York City and operate as an independent unit of SoftBank, led by current CEO Randy Nardone and Co-Chairmen Pete Briger and Edens.

Fortress was a trailblazer when it went public in 2007, becoming the first U.S. hedge-fund manager to do so.

“The IPO was billed as a move toward ‘democratizing’ hedge- and private-equity funds, which have long been reserved for the wealthy and big institutional investors such as pension funds,” WSJ reporters Liz Hoffman, Jenny Strasburg, and Sarah Krouse wrote. “But Fortress’s shares soon slid as the financial crisis broadly hit the returns of private investment funds.”

The shares debuted at around $35 but were down around $6 prior to the SoftBank deal being announced. They were up 28.66% to $7.99 at the end of the trading day Wednesday. Each Fortress Class-A shareholder will receive $8.08 per share under the merger agreement.

SoftBank CEO and Chairman Masayoshi Son wants to transform the company—which controls mobile phone company Sprint, among others—from a major force in the tech and communications realm into “one of the world’s biggest asset managers,” the WSJ reported. The Fortress acquisition will help in this effort, as the company manages about $70 billion in assets, with investments in real estate, credit, and private equity.

Executives at SoftBank have internally discussed doubling Fortress’ assets within three years, an unnamed source told the WSJ.

Son also plans a $100 billion fund to invest in technology such as artificial intelligence and the “Internet of Things,” such as smartwatches or thermostats that are connected to each other online, according to the WSJ. Some have said that this type of tech could be revolutionary for aging care.

The SoftBank-Fortress transaction is expected to close in the second half of 2017, the companies stated.

Written by Tim Mullaney

Photo Credit: “SoftBank” by Miki Yoshihito, CC BY 2.0

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