Tustin’s Regency Health to Be Sold for $369 Million

TUSTIN — Nursing home operator Regency Health Services Inc. is being acquired by a New Mexico company twice its size for $369 million in cash, or $22 a share, the companies announced Monday.

Sun Healthcare Group Inc., based in Albuquerque, will also assume about $220 million of Regency’s debt.

The proposed buyout, approved by the companies’ boards, is the latest of several deals this year in the rapidly consolidating nursing home industry.

Richard K. Matros, chief executive of Tustin-based Regency, says recent consolidations have created companies with billions of dollars in sales, putting smaller companies like Regency at a disadvantage. Last year, Regency earned $5.2 million on $558.1 million in sales.

“Why would people on Wall Street bring [acquisition] deals to us when they have $3-billion guys to go to?” Matros said. “That meant we had to size up.”

The Regency deal, together with Sun Healthcare’s planned acquisition of Retirement Care Associates Inc., an Atlanta-based nursing home operator, would make the New Mexico company one of the largest in the industry.

Regency’s stock surged 29% Monday to close at an all-time high in heavy trading on the New York Stock Exchange. Regency shares rose $4.81 to $21.19.

Sun Healthcare shares rose $1.50 to $21.63, also in heavy trading on the New York Stock Exchange.

Assuming regulators and shareholders approve the deal, Matros, 43, and several other top Regency managers plan to leave to start their own local health care company.

As part of the acquisition, Sun Healthcare would pay Regency executives, including Matros, a total of several million dollars to buy out their contracts and stock holdings, said Andrew L. Turner, Sun Healthcare’s chairman and chief executive.

About 100 employees at Regency’s corporate headquarters--mostly in financial and accounting areas--would likely lose their jobs, Turner said.

Regency and Sun Healthcare have had merger talks previously. Two years ago, Turner said he approached Matros about a possible purchase of Regency.

However, Regency’s involvement in shareholder litigation at the time prevented a deal, Turner said. The litigation has since been resolved, he added.

This time around, Matros approached Turner. And both believed, at least in a marketplace controlled by managed care companies, that their companies would be better off together than apart.

Turner claims that bigger is better, especially in negotiations between nursing home operators and the managed care industry.

“If one has a larger number of facilities, it’s more likely that you will be able to negotiate than if you have little to offer,” he said.

Regency’s businesses would strengthen Sun Healthcare’s presence in California. Regency owns 116 nursing homes, including 42 in the state. The company also operates 26 clinics offering rehab therapy and eight pharmacies.

Sun Healthcare already operates 17 nursing homes in California--16 in the northern part of the state and one in San Diego. The company also operates three rehab clinics, one in Los Angeles, and a pharmacy.

Earlier this month, Sun Healthcare itself said the Justice Department had wrapped up a two-year criminal investigation into the company’s billing practices and wouldn’t pursue charges against the company or penalize it. The agency’s civil investigation continues.

If the deal proceeds, Matros said, Regency executives intending to join him in a new venture include its chief financial officer, Bruce Broussard, who will be Matros’ partner; Sherri Medina, a Regency senior vice president; Harold Andrews, a vice president; and Janie Trevor, Matros’ executive assistant.

“It’ll start pretty soon after the deal closes,” Matros said.

The new company would be privately held, located in Orange County, and largely financed by investors other than management, he says. He wouldn’t specify which health care market the company would pursue.

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Sun-Regency Merger

Tustin-based Regency Health Services is being acquired by Sun Healthcare Group, a New Mexico-based company that has another acquisition in the works. Details on the merger:

REGENCY HEALTH SERVICES

Headquarters: Tustin

President/CEO: Richard K. Matros

Business: Nursing homes providing rehabilitation, neurological care, basic and intermediate skilled nursing care, assisted living and pharmacy

Went public: 1992

Exchange: NYSE

Employees: 16,000

1996 net sales: $558 million

1996 net income: $5.2 million

Purchase price: $369 million cash and assumption of $220 million debt

SUN HEALTHCARE GROUP

Headquarters: Albuquerque, N.M.

Chairman/president/CEO: Andrew L. Turner

Business: Nursing homes, medical supplies, physical therapy and pharmacy services to nursing-home industry in the United States and Britain

Went public: 1993

Exchange: NYSE

Employees: 48,500

1996 net sales: $1.3 billion

1996 net income: $21.5 million

When the Ink Dries

Here’s how Sun Healthcare compares now with Regency and the other company it is trying to acquire, Retirement Care Associates, and how Sun will look with the assets of all three companies combined:

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Retirement Regency Sun Healthcare Care Health Group Associates Services Long-term care facilities 311 83 116 Long-term care beds 29,122 8,526 11,493 Assisted-living facilities 5 42 0 Assisted-living units (apartments) 514 4,069 0 Employees 48,500 7,700 16,000 Physical therapy contracts 1,012 83 202 Pharmacy contracts 537 125 164 Specialty supply contracts 0 550 0 Outpatient rehab clinics 43 0 26 Home health care service locations 0 0 23

Combined Long-term care facilities 510 Long-term care beds 49,141 Assisted-living facilities 47 Assisted-living units (apartments) 4,583 Employees 72,200 Physical therapy contracts 1,297 Pharmacy contracts 826 Specialty supply contracts 550 Outpatient rehab clinics 69 Home health care service locations 23

*--*

Source: Bloomberg News; Researched by JANICE L. JONES / Los Angeles Times