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National Medical to Spin Off Hillhaven Corp.

Times Staff Writer

National Medical Enterprises, resorting to a popular corporate technique to boost shareholder value, said Thursday that it plans to spin off its troubled nursing home subsidiary, the Hillhaven Corp.

The bid to split off the nation’s second-largest nursing home chain to existing NME shareholders “should benefit” them because “the marketplace will evaluate the long-term care operations separately from our acute and specialty hospital business after the spinoff,” Richard K. Eamer, NME’s chairman and chief executive, said.

The Hillhaven Corp., based in Tacoma, Wash., ranks behind Pasadena-based Beverly Enterprises. It operates 349 nursing facilities with more than 43,000 beds in 37 states. But belt-tightening in government-funded Medicaid and Medicare programs have hurt its profitability in recent years. Nursing homes derive a major portion of their revenue from Medicare.

This new austere financial climate has prompted some health-care firms to spin off under-performing subsidiaries to increase shareholder values. The stock distributions involved are ordinarily not taxable to the parent firm or shareholders, and the transaction can mask the impact of an under-performing unit on its parent if the unit were sold outright.

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“When you spin a company off, it becomes someone else’s problem,” said Jerry Balter, a health-care analyst at the San Francisco in vestment house Robertson, Colman & Stephens. “If (NME) sold (Hillhaven) outright, (it) would probably have to take a major loss. This way it will have a delayed impact.”

NME, which owns and manages 37 acute-care general hospitals with about 6,700 licensed beds, will issue current NME stockholders additional shares in the newly independent Hillhaven unit.

Although NME’s long-term care facilities account for 32% of NME’s revenue, they contribute only 12% of the profits. By comparison, NME’s general and specialty hospitals--which account for 41% and 27% of revenue, respectively-- contribute 46% and 42% of profits.

NME anticipates that, after shareholder distribution, the common stock of the Hillhaven Corp. will be listed on the New York Stock Exchange and that the company will have annual revenue of about $1 billion.

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NME officials would not say what effect the spinoff might have on NME’s bottom line.

The disclosure of NME’s plan, which is subject to government approval, came as the company announced record earnings for its second quarter ended Nov. 30.

NME said second-quarter revenue rose 16% to $894.6 million and net income climbed 8% to $47.3 million from a year ago. In a prepared statement, Eamer attributed the improvements to “the strong performance” of NME’s specialty hospitals.


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