Investors opposed to Sabra Health Care REIT Inc.'s proposed acquisition of Care Capital Properties Inc. received a boost from an influential shareholder advisory service, which called on shareholders to withhold support for the transaction.
In an Aug. 2 note, Institutional Shareholder Services cited the "fragility" of Care Capital's portfolio and ongoing difficulties in the skilled nursing industry, "coupled with the high price that would be paid for the assets," in questioning whether potential benefits from the transaction would be achievable or sustainable, according to a news release from Hudson Bay Capital Management LP.
Sabra and Care Capital shareholders are scheduled to vote on the deal in Aug. 15 special meetings. Hudson Bay and Eminence Capital LP, both Sabra shareholders, have criticized the acquisition and said they will vote against it. Sabra countered that it sees continued value in skilled nursing and has a play to improve performance at the Care Capital properties.
ISS declined to comment or release a full copy of its report, though a spokesman did not dispute the accuracy of the passages in Hudson Bay's release.
According to Hudson Bay, ISS cited a decline in Sabra's share price since the deal was announced and said concerns about the future of skilled nursing policy and the deal's valuation "support the dissidents' argument that the transaction would be value destructive" for Sabra shareholders.
"We strongly believe that ISS reached the wrong conclusion," Sabra said in a news release, citing its management team's "proven track record of value creation" and operating experience.
The company also argued that the transaction will diversify its tenant base, increase its scale and help improve its credit ratings, and will generate roughly $20 million in cost savings.
ISS "fails to demonstrate an understanding" of the skilled nursing industry, the company added, arguing that skilled nursing properties are an integral component of the U.S. healthcare system and can provide attractive risk-adjusted returns with the right operators.
Stifel analyst Chad Vanacore said in a note that the ISS recommendation "complicates matters" for Sabra and will lead to greater shareholder opposition. He argued that the deal is still likely to close, but said Care Capital could agree to a lower sale price to appease the opposition and remove the strongest argument against the transaction.
Vanacore argued that the situation is a "win-win" for Sabra shareholders, citing what he described as long-term benefits for the company if the deal closes and the potential for the company's share price to increase if the deal falls through.