Might A New Doctor Cure Beverly?

Pity the poor shareholder at Beverly Enterprises Inc. Last April, when the Fort Smith (Ark.) nursing-home chain--the nation's largest--announced plans to spin off most of its Pharmacy Corporation of America (PCA) subsidiary, investors cheered. After years of waiting for management to take action to boost its stalled share price, optimistic investors pushed the stock up 10%, to nearly 16.

The euphoria didn't last long. A month and a half later, an embarrassed Beverly announced that problems at PCA, which sells drugs to institutions, would delay the spin-off. Moreover, PCA's travails would torpedo Beverly's profits. By June, its stock sagged to 11.

MISFIRES. Such is life for Beverly shareholders, who've spent several years hoping that patience with CEO David R. Banks would pay off. Following the company's near-collapse in the late 1980s, Banks, the longtime president, began nursing it back to health. By the mid-1990s, with health care taking off, investors piled back into Beverly stock.

But like the gang that couldn't shoot straight, Banks and his team have since presided over a series of management mishaps. Beverly shares trade today at 13--exactly where they were in late 1992. Among investors' gripes: poor results, missed earnings projections, and questionable acquisitions. Now, in the wake of the botched PCA spin-off, many think Beverly looks ripe for takeover. "If a buyer comes along, I'm going to take my money and run," says one big stockholder.

Indeed, many investors say that if Banks and his team can't fix Beverly, it's time someone else took over. "I wouldn't be surprised at all if investors began pushing for a new management team," says Nancy J. Healy, an analyst at UBS Asset Management Inc., which holds about 1.5 million shares. "The strategy is being completely mismanaged." Bankers say Beverly is popping up on acquisition target lists all over Wall Street. "Hillhaven's going, and it looks as if Beverly could be next," says one investment banker specializing in health care--comparing Beverly with rival Hillhaven Corp. "It looks very vulnerable right now."

SICK LIST. The most visible sign of pressure: In mid-July, Beverly director William K. Weinstein--a senior partner at San Francisco investment bank Genesis Merchant Group Securities--stormed off the board. Investors say Weinstein had pushed the board to hire an investment banker to explore merger options. But when the board--which remains firmly behind Banks--refused, Weinstein quit, blasting the company for not moving to "maximize shareholder value."

So why is Beverly on everyone's sick list? After all, it has plenty going for it: Sales approach $3 billion, and PCA is the biggest player in the lucrative field of selling drugs to institutions.

Yet for all that, Beverly remains one of health care's worst underperformers. Its 1994 operating margin, at 14.7%, trailed well behind the roughly 20% earned by smaller rivals such as Manor Care Inc. or Integrated Health Services Inc. Its return on capital also lags: At 12.7%, says Dean Witter, Discover & Co. analyst D. Scott Mackesy, Beverly falls below Hillhaven's 15.5% and Manor Care's 21.6% (chart).

David Banks declined to be interviewed by BUSINESS WEEK. But CFO Robert D. Woltil argues Beverly is cutting costs and shifting away from dependence on low-margin Medicaid patients: Beverly has recently boosted its share of higher-paying Medicare and private patients. It's moving into more profitable services, such as rehabilitation therapy and sub-acute care. "We're doing things that we think make sense for the long term," says Woltil.

Such moves have yet to add much luster to Beverly. Margins have improved slightly--but they remain far behind industry leaders. And critics point out that the shift into more lucrative services comes several years behind rivals. Even Woltil concedes that efforts "haven't reached that payoff point yet, but we think they will very soon."

The prospect of a future payoff might be enough to soothe investors--if it weren't for the management miscues. For starters, says John Carlson, portfolio manager at Liberty Investment Management Inc., which holds 2 million shares, Beverly has a history of missing earnings estimates. That has cost it credibility with Wall Street. Although Woltil says the problem is in the past, others aren't sure. "They have a lot of unpleasant earnings surprises ahead of them," says Andre C. Dimitriadis, Beverly's former CFO. "I think financial planning at Beverly is nonexistent."

TOO SLOW. In a bid to diversify, Beverly has also acquired four smaller health-care outfits since early 1994, including Insta-Care Holdings Inc., an institutional-drug marketer, and three subsidiaries of Synetic Inc. But Beverly overpaid for several of the acquisitions, investors and analysts say, yet has been slow to reap benefits. "They really wanted Synetic, and they felt the synergies would offset the price," says Mackesy. "But they didn't get the synergies fast enough." As a result, he estimates 1995 earnings to be up 10%, to $83 million--far weaker than expected earlier.

Beverly had hoped the PCA spin-off would mollify investors. It planned to sell 19.9% of the unit to the public, then spin off the remainder to shareholders. But that, too, has turned into an embarrassing stumble. Just before the spin-off was announced, PCA changed its pricing policies for intravenous-therapy sales. Combining a two-tiered pricing system into one, it offered the same price and service to both high- and low-end clients--and promptly lost many customers. Beverly delayed the spin-off, pushed out PCA's CEO Ronald C. Kayne, and scrambled to put the old payment system back in place. Still, PCA's troubles helped drag Beverly's second-quarter net income down by 24.7%.

Woltil says that PCA is beginning to recover and that the spin-off will occur in early 1996. But skepticism runs high. "This management is unable to run the company effectively," says one shareholder. "If by the end of the year we haven't seen the changes promised at PCA, I think the noise from investors will get much louder." For Beverly's managers, that sound may soon be deafening.