Covington Investments Proposes To Acquire All Outstanding Shares Of Advocat Inc. For $8.50 Per Share In Cash -- Approximately A 100% Premium
ATLANTA, May 11, 2012 /PRNewswire/ -- Covington Investments, LLC (together with its affiliates ("Covington")), today submitted a non-binding proposal to acquire all outstanding common shares of Advocat Inc. (NASDAQ: AVCA) for $8.50 per share in cash in a negotiated transaction. Covington is a privately owned and growing provider of long-term care services in Florida, Ohio and Tennessee. In a letter sent to the Company's Board of Directors this morning, Covington details, among other things, that its proposal represents certain and substantial value for Advocat's shareholders at an approximate 100% premium over the Company's unaffected share price and expresses its desire to open negotiations aimed at reaching a mutually agreeable transaction. The consummation of the transaction would not be subject to a financing contingency, nor does Covington believe the transaction would encounter regulatory delays. The full text of the letter, made public for the benefit of all Advocat shareholders, follows:
May 11, 2012
Board of Directors
1621 Galleria Boulevard
Brentwood, Tennessee 37027
Attn: Mr. Wallace E. Olson, Chairman of the Board
Mr. Chad A. McCurdy, Vice Chairman of the Board
Dear Messrs. Olson and McCurdy:
In letters on February 27, March 22, and April 12, 2012, we made what we believe to be very compelling proposals to acquire Advocat Inc. ("Advocat") in a transaction that would provide substantial value to your shareholders. We were surprised and disappointed that Advocat's Board of Directors has shown no interest in a discussion to explore our acquisition proposal. We are confident your shareholders would want and expect the Board to explore with us the possibility of such a compelling transaction. We, therefore, have decided to make our proposal public in order to inform Advocat's shareholders of the significant value they could receive in a transaction with Covington.
We remain interested in pursuing discussions in a mutually agreeable and negotiated manner if possible.
To reiterate the key terms of our proposal, we have submitted a non-binding indication of interest to acquire all of the outstanding shares of common stock of Advocat at a price of $8.50 per share in cash in a mutually agreeable and negotiated transaction (the "Proposal"). The Proposal values Advocat's common shareholders' equity at approximately $51 million, or approximately $44 million excluding the shares already owned by Covington's affiliates. As you know, this price was increased from our initial indication of interest on February 27th of $7.50 per share to be responsive to the Advocat Board's indication that such price was not sufficient to discuss a combination.
It is our view that our proposed $8.50 per share offer represents an extraordinary value to shareholders of Advocat as the price represents:
- a 96% premium above the closing price of $4.34 on May 10, 2012;
- a 71% premium over the average closing share price during the past 30 days;
- a 55% premium over the average closing share price during the past 90 days; and
- a 47% premium over the average closing price during the past three years.
Additionally, the last time shares of Advocat closed at or above $8.50 per share was more than two and a half years ago in November 2009.
Our Proposal represents a multiple of the following:
- 6.0x enterprise value to latest twelve months EBITDA, compared to the comparable public company average of 5.2x; and
- 7.3x adjusted enterprise value to latest twelve months EBITDAR, compared to the comparable public company average of 6.3x.
Since Advocat's earnings per share have been negative for the twelve month period ending March 31, 2012, this offer is even more compelling when compared to the comparable public company average price to earnings multiple of 9.0x.
We do not understand how the Board's unwillingness to even discuss our Proposal in favor of an uncertain and questionable standalone strategy can serve the best interests of Advocat's shareholders. In light of Advocat's financial performance, as evidenced most recently in its first quarter earnings release on May 9, 2012, we are even more puzzled by the Board's refusal to entertain our Proposal. We believe, based on an extensive review of public information about Advocat, that our proposed purchase price is a full and fair one. As we have indicated to you, if Advocat's Board does not believe that our Proposal represents attractive value, we think it would be a better course for you to provide us with access to non-public information so that you can explain where you see greater value. If you can demonstrate that there is greater value than is apparent from publicly available information, we would be prepared to consider increasing the price of our Proposal.
This letter and our Proposal is an expression of Covington's interest only, and neither this letter nor any course of dealing shall constitute an agreement in principle or a legally binding offer or otherwise legally obligate either Covington (or any of its affiliates) or Advocat to proceed with or consummate any transaction unless and until a definitive agreement is executed. We reserve the right to discontinue discussions regarding, and withdraw, our Proposal at any time. Our Proposal is subject to customary conditions, including, among other things, our satisfaction with the results of due diligence, the negotiation of a mutually satisfactory definitive agreement, and receipt of approval by Advocat's primary landlord, Omega Healthcare Investors, Inc.
As we mentioned in our prior letters, Covington has held extensive discussions with our financing sources regarding this potential opportunity. In addition, Covington's recent successful closing of a $98 million syndicated credit facility to fund another acquisition and refinance existing debt gives us the confidence that we will be able to close in a timely manner on the purchase of Advocat without a financing contingency. Supplying us with the non-public information we have requested will allow us to expedite the completion of necessary due diligence and execution of appropriate definitive agreements.
Our team of financial advisors, Avondale Partners, LLC, legal advisors, Bass Berry & Sims PLC and Baker Donelson Bearman, Caldwell & Berkowitz, PC, and financing sources are standing by to assist with the due diligence and transaction process. Given our team's understanding of the long-term care sector and skilled nursing facilities in particular, we are able to complete such due diligence expeditiously and with minimal disruption if given access to management and upon receipt of relevant information. Upon execution of a definitive agreement, there would not be a financing contingency and we do not anticipate any regulatory delays.
Given our willingness to propose a purchase price at an attractive premium, as well as the regulatory, reimbursement and business headwinds facing Advocat, we believe it is very much in your shareholders' best interests for you to start a dialogue with us about our Proposal and provide us with access to the relevant company information. Your continuing refusal to engage with us only serves to delay and deny your shareholders the opportunity to consider this compelling transaction.
We look forward to discussing this transaction further with you.
John E. McMullan
Covington Investments, LLC
About Covington Investments, LLC
Covington's affiliates own and operate continuing care retirement communities offering skilled nursing, assisted living, independent living and home health services in Florida, Ohio, and Tennessee. The Companies' combined campuses comprise over 1,000 skilled nursing and assisted living beds as well as nearly 600 independent living units.
 Comparable public companies include The Ensign Group, Inc., National Healthcare Corporation, Skilled Healthcare Group, Inc., and Sun Healthcare Group, Inc.
 Adjusted enterprise value = market value of equity + preferred stock + debt (excluding debt associated with West Virginia) + lease expense capitalized using a 12.5% cap rate – cash.
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