Time For Advocat To Explore Strategic Alternatives?

Paul Kessler of Bristol Capital Advisors recently filed a 13D/A on Advocat, Inc. (AVCA) urging the company to "[e]stablish a special committee of directors which would immediately retain a well-known industry financial advisor to start an auction process and solicit offers for the Company and or engage in discussions with strategic buyers."

Recall that Bristol, together with Oakdale Capital had previously offered to buy the entire company for $16.80, which the company rejected. That offer didn't include much premium at the time, but it looks pretty good compared to the current price of $13.05. Bristol's latest 13D/A does not indicate that the $16.80 offer is still on the table, so I assume that it is not.

Recall that last August, both fundamentals and technicals were trending higher for Advocat. The moonshot which brought this stock up from around $3 to a high near $20 has since petered out, primarily because of back-to-back disappointing reports from the company. A report from tiny hedge fund Kinnaras Capital posits that shares are significantly undervalued at recent prices.

Both Bristol's letter and Kinnaras' report imply that an auction process would bring buyers out of the woodwork. I'm not so sure. If interest was so high, I would expect to see more 13-D filings and perhaps even a hostile tender. My conjecture, however, is irrelevant. Companies can gauge market interest quite easily by retaining an advisor to explore strategic alternatives -- a step Bristol recommends.

Bottom line: A formal auction process may be premature, and I highly doubt that Bristol gets the two board seats it has requested. At the same time, Advocat and its shareholders should know whether the company could be sold at a substantial premium. Bristol is right--Advocat should hire a qualified advisor to explore its options.

Disclosure: I have no position in AVCA.