Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

We're all familiar with the classic textbook play by activist shareholders, the one involving taking a stake in a company, prompting management to explore strategic alternatives and -- if all goes to plan -- ending up with a fat premium from a sale. 

The Activist Playbook
Demands by shareholder activists have diversified over the years and in 2016, U.S. and Canadian markets saw record levels of opposition to M&A.
Source: Activist Insight
*Data tracks demands since 2010

Less common, but not unheard of, is the case where these shareholders oppose a deal and call for it to be scrapped altogether rather than altered or improved. That's what makes the efforts from hedge funds and occasional activists Eminence Capital and Hudson Bay Capital Management to squash Sabra Health Care REIT Inc.'s takeover of larger REIT Care Capital Properties Inc., notable. 

Rarity
Activists in M&A targets often oppose deals in order to bump prices higher. Occasionally, as per below, they've balked at purchases by acquirers in which they held a stake and had some success derailing deals.
Source: Bloomberg
*Deal was ultimately terminated because Microchip Technology interloped and acquired Atmel

The arguments of Eminence and Hudson Bay, which together own 7.1 percent of Sabra, have merit. The key drawback to the deal is that Sabra, which had been focused on the better-performing sector of senior housing, is re-upping its exposure to skilled-nursing facilities. The latter is an industry where profits are flailing and demand has slid, mainly because of changes to Medicare.

It's easy to understand investor outrage: Health-care REITs have largely been spinning off or entirely exiting this corner of the industry, where operating challenges aren't expected to abate -- if anything, additional reimbursement reform could occur, which would be an even bigger negative. Plus, it's not like Sabra is snapping up Care Capital on the cheap: Management has admitted that after accounting for potential near-term rent cuts, the so-called capitalization rate, which uses a purchase price to measure potential return, shakes out at roughly 7.6 percent. That's noticeably below the yield range of 9 percent to 11 percent at which other skilled-nursing facility portfolios have changed hands (the higher the rate, the better the return on investment). 

Taking those and other factors into account, including the all-stock nature of the deal, Sabra's shares have sagged meaningfully since the transaction was announced in early May, driving down the value of the transaction to $3.6 billion from the original $4 billion (including debt). 

Unhealthy
Since announcing its acquisition of Care Capital, Sabra Health Care REIT shares have underperformed rivals
Source: Bloomberg

That move can be reversed if the deal is terminated, but for that to happen Eminence and Hudson Bay need proxy advisory firms Institutional Shareholder Services and Glass Lewis & Co. to land on their side (they'll deliver their guidance before the Aug. 15 vote). That's because Sabra's three largest shareholders, with a combined stake of 44.7 percent -- Vanguard Group Inc., BlackRock Inc. and FMR LLC (Fidelity) -- are likely to adhere to those recommendations and thus, have the power to determine the success or failure of their activist brethren.

The situation will be even more closely watched if the advisory firms have differing views and, for example, ISS advocates supporting the acquisition while Glass Lewis does the opposite (or vice versa). It's here that the broadly passive investors will have to make a decision.

BlackRock's Larry Fink has pledged to maximize "long-term value creation." If the firm and its peers follow that mantra, there's a decent chance that this deal gets a thumbs-down.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. One company that has felt the brunt of these changes is HCR ManorCare, a struggling nursing home chain that could see Carlyle Group LP hand over control of the company in exchange for a reduction in rent payments. 

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net