Advocat (AVCA) has been particularly walloped with this volatile market, going from $12 to sub-$10 and then back to the current $10.
The announcement of the acquisition of 7 facilities in Texas is evidence of management's focus on providing value to shareholders, given the low multiple of EBITDA paid (less than 4x 2006, even if you include the $3M or so in capex necessary to get the facilities up to minimum standards).
Assuming that the improvements take hold and the 7 facilities reach EBITDA margins in-line with what AVCA achieved for 2006 (8.8% for AVCA vs. the 6.6% for the acquired facilities) then this deal quickly becomes a no-brainer. This “no-brainer” conclusion assumes that occupancy goes from 74% to AVCA’s 2006 results of 78% or so.
I will admit, however, that I have no idea what “pro-forma” EBITDA in this case means, but, if I wrote it down correctly it was before synergies (which, in any case, would probably be small or non-existent). Put another way, they paid $10,300 per licensed bed (including the $3M in capex needed) vs. the value the market was/is placing on Advocat itself ($17-18,000 per licensed bed). You must admit that this deal wasn’t half bad even if you assume integration risk and warrants a much more positive response than the street has given them credit for, as they essentially bought the facilities for 40% less than where Advocat was trading on an EV/licensed bed basis before the deal.
Granted, the company has received criticism over the past year for not disclosing bids they'd received for the company. I don't view it as necessarily bad that they turned the bids down, just something they should have disclosed. AVCA has a lot of room for improvement, given their current operating metrics vs. peers, where occupancy rates seem to be around 90%, so it makes sense that management wouldn't want to sell out quite yet, as comments on this website and questions on conference calls proposed.
For instance, despite the >10% shortfall in occupancy rates ebitda margins are in-line with, or even superior to, those of peers, as Amit Chokshi so eloquently pointed out. Selling the worst house in the neighborhood often works out well for the buyer, but not necessarily for the seller.
Disclosure: Author is long AVCA