UPDATED: Advocat Not Saying “I Do” to Covington’s $51 Million Acquisition Proposal

Third time wasn’t a charm for Covington Investments, LLC, who has sent three rejected proposals to acquire Brentwood, Tenn.-based skilled nursing operator Advocat Inc. (NASDAQ:AVCA)—the latest for $8.50 a share (approximately $51 million).

“In letters on February 27, March 22, and April 12, 2012, we made what we believe to be very compelling proposals to acquire Advocat in a transaction that would provide substantial value to your shareholders,” wrote John McMullan, the president Covington Investments, in a letter to Advocat’s board of directors, dated May 11. “We were surprised and disappointed that Advocat’s Board of Directors has shown no interest in a discussion to explore our acquisition proposal.”

Covington believes Advocat’s shareholders “would want and expect” its board to “explore” the possibility of the transaction, and after the lack of response, the investment company has decided to make its proposal public “in order to inform Advocat’s shareholders of the significant value they could receive in a transaction with Covington.”


The proposal values the skilled nursing facility operator at $8.50 per share, for an approximate $51 million (or $44 million, excluding the 12% of shares Covington’s affiliates already own).

The price increased from the $7.50 per share offered in the Feb. 27 letter, after Advocat’s board indicated the price “was not sufficient to discuss a combination,” said McMullan in the letter.

Now that they’ve upped the price, Covington says their offer “represents an extraordinary value” to the operator’s shareholders, as the price represents a 96% premium above May 10’s closing price of $4.34, a 71% premium above the average closing share price in the past 30 days, and a 55% premium above the average closing share price in the last 90 days.


And, McMullan points out, the last time Advocat’s shares closed above $8.50 was in November 2009.

“We do not understand how the Board’s unwillingness to even discuss our Proposal in favor of an uncertain and questionable standalone strategy can serve the best interests of Advocat’s shareholders,” said McMullan in the letter. “In light of Advocat’s financial performance, as evidenced most recently in its first quarter earnings release on May 9, 2012, we are even more puzzled by the Board’s refusal to entertain our Proposal.”

Advocat reported a $1.54 million net loss attributable to shareholders in the first quarter ended March 31, 2011, attributed to Medicare reimbursement cuts and rising costs of facility staffing, marketing, and support areas resulting from “strategic initiatives,” according to Kelly Gill, the company’s CEO.

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“We remain focused on the implementation of our growth strategy, which centers on enhancing our high acuity patient care services, modernizing our facilities, and prudently expanding our facility portfolio,” said Gill in the first quarter earnings report. “We are seeing benefits from these efforts in terms of improved skilled census, our capabilities to market to and care for higher acuity patients and, as a result of the implementation of electronic medical records, the ability to better document the high quality services we have always provided.”

Following Covington’s public acquisition proposal announcement, Advocat shares surged over 70% on the NASDAQ to $7.39.

UPDATED: Advocat responded publicly on Tuesday to Covington’s proposals, saying that its board had unanimously determined that the “non-binding expressions of interest were not in the best interests of Advocat’s shareholders.” View the rejection letter to John McMullan.

Click here to view McMullan’s letter to Advocat shareholders.

Written by Alyssa Gerace

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