May 31 (Bloomberg) -- Extendicare Inc., a Canadian nursing- home operator, will spin off its Assisted Living Concepts unit and convert the remaining business into a trust to help boost its stock price. The shares fell the most in almost three years after the company decided not to pursue an outright sale.

Holders of Extendicare's subordinate voting stock will get one unit of the real estate investment trust and one Assisted Living share for each share they own, the Markham, Ontario-based company said in a statement today. Extendicare operates 438 nursing homes in the U.S. and Canada.

Extendicare had said in February that it was examining a sale or a conversion into a trust because the share price didn't reflect the company's worth. The stock had fallen 10 percent in the year before the announcement, and gained almost two-thirds afterward.

``Investors had expected a bid would come in for all or part of the company,'' said Danny Tomka, a fund manager at MFC Global Investment Management in Toronto, which manages about C$4 billion ($3.63 billion). ``At the end of the day, they're splitting the company up to drive value, but some of the expectations for a bid were higher.''

MFC Global sold most of its Extendicare shares after the company announced a possible sale, Tomka said.

Extendicare's Class A shares fell C$1.68, or 6.3 percent, to C$25 by the 4 p.m. close of trading on Toronto Stock Exchange. The drop was the largest since Sept. 26, 2003. More than 5.6 million shares traded, about 18 times the daily average over the past three months.

Assisted Living's Performance

Extendicare bought Assisted Living in February 2005 for $261 million, and the unit has almost doubled its earnings before interest, taxes, depreciation and amortization since then, Chief Executive Officer Mel Rhinelander said today in an interview.

``Assisted Living has performed very well, but that hasn't been reflected in the share price,'' Rhinelander said. ``The decision of the board was to try to find a way to get shareholders that value.''

Extendicare had ``expressions of interest'' in buying the company, Rhinelander said on a conference call today without elaborating. The Globe and Mail reported May 5 that Madison Dearborn LLC, a Chicago-based buyout firm, was in talks to buy the company in a transaction worth more than C$2 billion.

An independent committee ``felt this was of greater value than any other,'' Rhinelander said.

Investors may value Assisted Living lower than its rivals because Extendicare's controlling shareholders, Nova Scotia's Jodrey family, will still control the company through multiple- vote shares, Tomka said. That may deter potential bidders, he said.

Control of the Company

Holders of the multiple-vote shares will get 1.075 units of the REIT and one share of Nevada-based Assisted Living, which will list on the New York Stock Exchange, Extendicare said. The company also will transfer 29 homes to the assisted living unit, for a total of 206 sites in 17 states.

Shares of ``assisted living'' companies have traded at higher prices than nursing-home companies, which provide more medical and physical help for their patients, Rhinelander said. Investors had recommended that the company convert to a trust because rivals such as Chartwell Seniors Housing Real Investment Trust also have traded higher than Extendicare, he said.

``It's going to result in a good return to shareholders,'' Rhinelander said. ``They can participate in both or either of the companies or they can cash out and look at investments elsewhere. It gives them a tremendous amount of flexibility.''

The conversion of the rest of the business into the Extendicare Real Estate Investment Trust will provide investors with monthly cash distributions, the company said. The trust will stay on the Toronto exchange. The transactions should be completed in the third quarter.

Rhinelander plans to step down as chief executive officer and will become vice chairman of both the new company and trust.

(A replay of conference call can be heard until June 26 by dialing (1) (800) 408-3053 or (1) (416) 695-5800 and entering identification number 3188895.)

To contact the reporter on this story: Kevin Bell in Toronto at kbell2@bloomberg.net.

Last Updated: May 31, 2006 16:28 EDT