Recharter Vote Divides Care Enterprises Family
When the shareholders of Care Enterprises, the nation’s fourth-largest nursing home operator, gather for their annual meeting Thursday, they will be asked to approve a Delaware reincorporation scheme that will effectively strip them of control over their company.
Among other changes, the proposed new corporate charter will require shareholders to muster a 75% vote to oust any director, no easy task when insiders control roughly two-thirds of Care’s outstanding stock.
But more than just an issue of shareholders’ rights, the proposal, ostensibly to foil hostile mergers, threatens a partnership of three brothers who together have forged a business empire that also includes Knudsen Foods, the Los Angeles-based dairy giant, a small savings and loan and numerous real estate holdings.
The proposed reincorporation of Laguna Hills-based Care Enterprises pits Chairman Lee Bangerter and his brother, Dee, against their half brother and business partner Ted D. Nelson, who resigned May 5 as a Care director, charging that reincorporation will remove any accountability management has to small shareholders.
Nelson owns 22% of Care’s Class B common stock and another 21% of the company’s Class A stock, which carries a one-tenth voting right. Together, the two Bangerters own 45% of the Class B shares and 37% of the Class A shares.
Holding Company for Knudsen
Additionally, the three own a majority stake in Winn Enterprises, a real estate trust that they have managed over the years to transform into a holding company for Knudsen, the West’s largest dairy company, as well as Utah-based Mountain West Savings & Loan Assn.
Nelson’s resignation from Care’s board followed a vote by the board’s other six members in favor of the reincorporation.
The sole dissenter, Nelson charged that the proposal to relocate Care’s charter to Delaware is unfair because “it will enable incumbent management to maintain control of the company to the exclusion of, and with virtually no accountability or responsiveness to, minority shareholders,” according to Care’s proxy statement.
Although Nelson did not return numerous phone calls requesting an interview, the proxy statement said his objections center on provisions of the proposed new corporate charter that would effectively render small shareholders powerless against the company’s directors.
Cumulative Voting Rights
If approved, the new rules will eliminate cumulative voting, or the right of an individual shareholder to cast an equal percentage of his votes for each director in an election. Often, minority shareholders have been able to use cumulative voting rights--not permitted under Delaware law--to obtain toeholds on corporate boards of directors.
Nelson, according to documents filed with the Securities and Exchange Commission, objected to a provision of the Delaware charter that would require a 75% majority of shareholders to amend Care’s bylaws or to remove directors. Such rules are also a common feature of most anti-takeover incorporations.
“In this regard Mr. Nelson has pointed out that incumbent management holds more than 25% of the shares of each class of common stock and therefore could veto a merger or other business combination to benefit themselves,” the proxy stated.
Although Delaware reincorporations are becoming increasingly common because they can help protect against hostile takeovers, securities analysts say the proposal being put to Care’s shareholders is unusual because of the absolute majority enjoyed by Nelson and the Bangerters.
Don’t Need ‘Shark Repellent’
“They don’t need any shark repellent,” said health care analyst Margo Vignola, of the New York firm L.F. Rothschild, Unterberg, Towbin.
“There are a lot of non-health care companies that have taken a look at health care, and particularly nursing homes,” she said. “But none of these transactions have been on an unfriendly basis.”
Still, with today’s heightened concern about corporate raiders, coupled with the shortfall in nursing home beds, “there are a lot of people who believe that small nursing home companies are good targets for takeover,” Vignola said.
Neither Bangerter returned telephone calls requesting a comment. However, Boyd Hendrickson, Care’s president and chief operating officer, said the company has not received any merger offers.
Among a host of possible explanations for the current dispute, analysts said, could be a quiet takeover bid that, while opposed by the Bangerters, was favored by Nelson. A securities analyst who asked that his name not be used said that another possibility is that Nelson wants to put all or part of the company up for sale and is opposed by his brothers.
Despite the likelihood that Nelson will vote against reincorporation Thursday, at least 44% of Care’s Class B stock and another 36% of the Class A shares can be counted on to vote in favor of the move, according to the proxy statement.
Institutional Holders
According to documents filed with the SEC, institutional holders account for a small fraction of Care’s public ownership. The largest holders, Boston-based FMR Corp. and New York-based Chase Manhattan Corp, which together account for about 13.6% of Care’s Class B shares, declined to comment.
Although the disagreement between Nelson and the Bangerters appears to center on the issue of shareholder rights, other analysts suggest that the roots of the dispute are not at Care at all.
“I think the root of the problem was in how Winn was being run,” said Jeff Logsdon, an analyst with the Los Angeles investment house of Crowell Weedon & Co. “I think if you go back and trace this current situation, you will find that something happened at Winn.”
Heavily burdened with the debt it accumulated as a result of the $74.8-million Knudsen acquisition in 1983, and the more recent purchase of San Francisco-based Foremost Dairies for $50.1 million, Winn Enterprises posted a net loss of $3.2 million during the first nine months of fiscal 1985, contrasted with net earnings of $6.1 million a year earlier.
Last week, Winn said it hired two investment banking firms to handle a possible sale of the Knudsen unit and to help find a solution to the compnay’s oppressive debt.
Moreover, documents filed with the Securities and Exchange Commission last year revealed that Winn Enterprises was in violation of loan agreements with its principal creditor, Citicorp Industrial Credit Bank.
Relationship Strained
In December, Nelson took the helm at Winn Enterprises, assuming the post of chairman from Dee Bangerter. Although Bangerter willingly nominated his half brother for the job, the relationship was apparently strained as a result, analysts say.
“There were some operating differences at Winn Enterprises,” said Steven Reid of Wedbush, Noble, Cook Inc., a Los Angeles brokerage house. “There has been a tiff among the family members, as well.”
Nelson and the Bangerter twins, members of the Mormon Church, are reportedly millionaires several times over. They initially built their fortune on Care Enterprises, which has grown from a tiny operation with one nursing home in Anaheim into the fourth-largest operator of nursing homes and convalescent hospitals in the United States.
Since Care’s initial public offering in 1983, the company has grown from 40 facilities to 124 in seven states. And while revenues have grown steadily, profits have remained small, even by the standards of an industry well-known for low margins.
Saddled with more than $190 million in debt, largely the result of its rapid expansion drive, Care’s already tiny profit margin melted into an operating loss of $190,000 during the first quarter of 1986.
The loss, offset by a non-operating gain of $454,000 from the sale of three nursing homes, occurred despite a hefty 37.5% increase in first-quarter revenues and stands in stark contrast to net earnings of $572,000 a year earlier.
“The situation will be turned around during the second quarter,” Hendrickson said. Care is attempting to refinance its debt and improve its profit margins both by selling off lackluster facilities as well as by reducing the number of low-profit patients whose bills are paid by Medicaid and other programs for the indigent, Hendrickson said.
And, while more nursing homes and convalescent homes will go on the block, the sales do not represent a retreat but rather are an attempt to increase profits by improving the company’s mix, said Derwin Williams, Care’s chief financial officer.
‘A Period of Digestion’
“Selling for us is a general policy. There are some facilities we have targeted as being candidates for sale, but we haven’t set any time for selling them,” Williams said. “When you’ve grown as rapidly as we are growing, you need a period of digestion.”
Care will continue to make acquisitions as suitable opportunities occur, he added.
Although low-profit margins are common among nursing home operators, a criticism that has been leveled at Care Enterprises is that for a company its size, the salaries paid to its key officers are excessive.
According to documents filed with the SEC, the top six officers at Care, including Lee Bangerter, Hendrickson and Williams, received $1.2 million in cash compensation during 1985--more than a third of the company’s $3.6 million in 1985 net earnings. Revenues last year totaled $238.5 million.
“When you’re successful, you can do a lot of things. When you’re not bringing in the bacon, you can’t,” said Larry Selwitz, health care analyst with the Los Angeles investment house of Bateman Eichler, Hill Richards Inc.
“That’s always been my big complaint with Care Enterprises. The money isn’t dropping to the bottom line, it’s going to salaries,” Selwitz said. “My whole sense is that if you’re going to be a public company, you’ve got to give value to the shareholders.”
