Will Manor Care Spin Off Choice Hotels?by
Growth potential alone won't make Ron Baron buy into a company. "We also have to like the business it's in and the management," he says. If it's also way underpriced, so much the better. That's why his Baron Capital Management has bought 1 million shares of Manor Care, one of the largest U.S. nursing-home companies.
Manor Care is unusual: In addition to 163 homes in 28 states--plus one acute-care hospital in Texas--Manor Care owns Choice Hotels International, a worldwide franchise with 3,200 hotels and motels operating under such names as Quality Inn, Econo-Lodge, Comfort Inn, and Friendship Inn.
Whispers say the company will take Choice Hotels public "sometime soon--certainly this year"--by selling 20% to the public and distributing the rest of the shares as dividends to Manor Care shareholders.
Manor Care stock closed at 275/8 on Sept. 13. But Baron reckons just the hotels--franchised and company-owned combined--are worth $20 a share. Together with the nursing homes, estimated at $21, and the division that manages Manor Care's properties, worth $15, Baron calculates the company's total value--net of debt--at $56 a share.
EXTRA BEDS. Manor Care is benefiting from a hotel turnaround, notes Baron. He sees Choice Hotels' franchise revenues--$161 million for the year ended May 31, 1994--jumping to $193 million next year. He puts the value of the franchised hotels at $650 million, or $12 a share. The company-owned hotels, which generated revenues of $78 million in fiscal 1994, should climb to $104 million. Baron values this group at $500 million, or $8 a share.
The nursing-home business should stay strong, analysts figure, producing revenues of $923 million in fiscal 1994. Baron reckons revenues will increase to $1.1 billion this fiscal year and $1.2 billion in 1995. Revenue growth will be helped by additional nursing units and by the startup of facilities for patients with Alzheimer's disease.
Baron figures Manor Care will earn $1.67 a share in fiscal 1995 and $2.13 in 1996, up sharply from 1994's $1.29. His estimates don't yet reflect any changes in the structure of the Choice Hotels business. Manor Care Treasurer Jim MacCutcheon says separating Choice Hotels "is an idea we look at from time to time, but there's nothing we're prepared to announce at this point."