The ongoing fight between activist shareholders and the managing director of Five Star Senior Living (Nasdaq: FVE) has reached yet another level of intensity.
Shareholders William Thomas and Robert Thomas, co-founders of Oklahoma-based senior housing owner and operator Senior Star, have penned a lengthy public letter to other Five Star shareholders in which they blast Five Star’s governance and call for support in their efforts to create change. Newton, Massachusetts-based Five Star is the fourth-largest U.S. senior living provider by resident capacity.
“We are writing to you to express our deep concerns regarding the improper manner in which the misaligned Board of Directors of Five Star Quality Care, Inc. is permitting Managing Director Barry M. Portnoy to firm up his value-destructive grip on our company and to urge you to reject the inadequate, coercive and unilateral $3.00 per share tender offer that is set to expire at midnight this Thursday, November 10, 2016,” the letter begins.
The tender offer in question was made last month, and involves a Portnoy-owned entity buying up to 18,000,000 shares at a price of $3.00 per share.
The Thomas Brothers—who together own about 6.8% of FVE’s outstanding shares—made a competing offer. Their offer involved the same number shares as Portnoy’s offer, priced at $3.45 per share. However, the brothers did not receive the necessary waivers from Five Star and its major landlord, real estate investment trust Senior Housing Properties Trust (Nasdaq: SNH). As a result, the Thomases will no longer be able to proceed with their tender offer, for which they lambasted the directors of Five Star.
“With fairness as the only natural guiding principle, any reasonable person would question why Five Star’s purported ‘Independent Directors’ have unilaterally elected to provide one of their Managing Directors the exclusive rights to a bid process not open to others,” the letter states. “In fact, these ‘Independent Directors’ have intentionally precluded us from proceeding with a competing offer that would provide shareholders a 15% cash premium to the Portnoy Tender Offer.”
The Five Star directors are not independent at all because they are all involved in a “web” of interrelated companies, and they are seeking to retain control over these entities for their own personal enrichment, the Thomases wrote. Among the examples they cited were that Barry Portnoy is the controlling shareholder of RMR LLC, which provides management services to Five Star and SNH; Five Star President and CEO Bruce Mackey and Treasurer and CFO Richard Doyle are officers and employees of RMR LLC; Barry Portnoy and Adam Portnoy are managing trustees of SNH; and Barry Portnoy formerly was a partner and Chairman of Sullivan & Worcester, which now is Five Star’s corporate counsel.
The board therefore cannot be trusted to work in shareholders’ interests, the Thomas brothers contend. Shareholders should reject the Portnoy tender offer as a way of preventing him from consolidating control of the company and to send a signal that changes need to be made, their letter states.
One of those changes is the election of a truly independent board member, according to the Thomases. They have nominated David Ford to be this person.
Ford has no ties to the Portnoys or the Thomases, according to the letter, and he has significant senior housing experience, as the former Vice Chairman of the Board of Managers for Aegis Living.
With better corporate governance, Five Star could effect a turnaround plan to recapture shareholder value after a period in which the stock has underperformed compared to peer companies, the Thomases believe. They put forward one such plan last year, proposing to buy the 33-property portfolio of Five Star’s owned assets for $325 million—a price that they say would have equated to about $6.50 per share, or more than double the Portnoy tender offer.
That proposal to acquire Five Star’s owned properties was rejected last year. Since that time, SNH has acquired seven of the properties.
ABP Acquisitions LLC, the company owned by Portnoy, responded Tuesday to the letter issued by the Thomas Brothers, targeting “misstatements and improper innuendos” outlined by the pair that ABP believes are relevant to shareholders.
For one, the company claimed its pending offer is not coercive, but rather completely voluntary for shareholders to cash in at their discretion. Additionally, ABP shot down the idea that the Thomas Brothers ever offered to buy Five Star for $325 million, or any price—rather, ABP accuses the Thomas Brothers of interest in acquiring Five Star’s best properties “at bargain basement price.”
The response also puts into question whether the Thomas Brothers made an offer for Five Star shares at a higher price than ABP, and maintains that the relationship between Five Star and SNH is entirely acceptable.
Five Star declined to comment for this article.
FVE shares were trading up 3.85% as of end of day Tuesday.
Written by Tim Mullaney