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Advocat Inc. (AVCA) rose to challenge its all-time high after announcing that it had reached an agreement with Omega Healthcare Investors (OHI) to restructure the preferred stock issued to OHI and renew the master lease agreement between the companies.

Basically, in exchange for increased rent payments, the conversion feature of the preferred was eliminated. This both prevents future dilution and streamlines the capital structure of the company, making it more attractive to a potential acquirer. The latter motive was not mentioned by the company and the conclusion is mine alone, but remember that Advocat has already received at least one buyout offer.

Advocat CEO William Council explained:

We are pleased to reach these agreements with Omega. The elimination of the conversion feature removes a significant dilution to our current shareholders, and provides a greater degree of stability in our capital structure. We are pleased that Omega agreed to discount the value of the underlying shares, capturing that value for Advocat's current shareholders.

The early renewal of the lease provides more stability and long term certainty for our nursing center operations, particularly in light of the contemplated facility renovations. We are pleased that Omega is showing its continued support for this important strategic initiative by agreeing to provide up to $5 million in financing for these facility renovations. The renovation funding is in addition to the previous $5 million funding for renovations which we are completing in 2006.

The market was pleased with the deal, sending shares up over 8%. I am currently out of the stock, having sold at the last run to $20. Advocat has pulled back following most of its recent earnings reports. If it does so again this time, I'll probably be a buyer.

Disclosure: Author has no position in AVCA or OHI

AVCA 1-yr chart:

AVCA chart

Source: Advocat Restructures Preferred Stock; Now More Attractive Takeover Target