Can Activist Shareholders Scuttle Sabra-CCP Deal?

Sabra Health Care REIT, Inc.’s (NASDAQ: SBRA) impending merger with Care Capital Properties (NYSE: CCP) has been met with resistance from two shareholders, and while the aggrieved parties control only a small percentage of the Irvine, Calif.-based real estate investment trust (REIT), one commentator says they can still make closing the deal difficult.

Shareholders Eminence and Hudson Bay, a pair of New York City-based hedge funds that together control 7.1% of Sabra, have announced their intentions to vote against the merger on Aug. 15. Though that number may seem small, Bloomberg’s Gillian Tan laid out multiple scenarios in which “activist” shareholders eventually scuttled major mergers, including a failed 2016 bid that would have seen New York REIT (NYSE: NRT) combine with real estate firm JBG Companies.

That proposed $8.4 billion transaction fell apart thanks to repeated criticism from shareholder WW Investors, which complained that the deal would not create long-term value for shareholders, according to contemporary reports. Eminence and Hudson Bay have made similar arguments against the Sabra-CCP merger, expressing concerns over CCP’s portfolio of skilled nursing facilities, which face a variety of challenges — from changes in payment structures to aging physical plants.

Proxy battle

Though the two players can’t derail the deal on their own, Tan noted that their arguments could hold sway over large shareholders Vanguard Group, BlackRock, and Fidelity, which together control 44.7% of Sabra. BlackRock CEO Larry Fink has in the past talked about maximizing “long-term value creation,” Tan wrote.

Tan identified the release of guidance from proxy firms Institutional Shareholder Services and Glass Lewis & Co. — expected before the vote — as a major potential turning point for the proposed merger.

Hudson Bay deemed the Sabra-CCP merger “disastrous” in a presentation to shareholders, and both hedge funds pointed to key CCP tenant Signature HealthCARE, LLC’s financial woes as reasons to vote against the proposed merger — with Eminence predicting that the Louisville, Ky.-based Signature could “very likely” file for bankruptcy protection soon. In addition, both Hudson Bay and Bloomberg called out declines in Sabra’s stock price since the deal was announced, which have resulted in the overall value of the merger dropping from $4 billion to $3.6 billion, Tan wrote.

Sabra’s optimism

Sabra CEO Rick Matros was upbeat about the deal in a recent interview with Skilled Nursing News, pointing out that SNFs remain a necessary part of the health care landscape and emphasizing that his company wasn’t necessarily making a bet on SNFs. Instead, Matros said, the deal would allow the company to reduce the cost of capital — a charge that Hudson Bay has disputed — and diversify the REIT’s portfolio.

He also identified a gap between optimism at the ground level and angst among the investor class, and positioned the shift to value-based and neutral-site payment models as a potential boon for the SNF industry.

“Providers that can take care of [residents] with the best outcomes, take the highest-acuity patients without concerns about re-hospitalizations, those are going to be the winners. I think skilled nursing is well-positioned to do that,” Matros said.

Written by Alex Spanko