Merger Begins at Home : Abbey-Homedco Deal May Create Health Care Titan

In a move that would create the nation’s largest provider of home health care services, Abbey Healthcare Group and Homedco Group on Thursday said they have agreed to merge their nationwide operations through an exchange of stock.

The proposed combination of the two Orange County companies, whose headquarters are only about a mile apart, comes amid a health care business boom in the wake of government and corporate efforts to cut medical costs. By charging less than hospitals for treating patients at home, the industry has grown about 25% a year and generated nearly $21 billion in sales last year.

A merger of Fountain Valley-based Homedco and Abbey Healthcare of Costa Mesa would result in a company with more than $1 billion in sales and a 7% share of the industry. By eliminating overlapping operations and offices, company officials said, they expect to save at least $40 million to $50 million a year.

On Wall Street, investors reacted enthusiastically. Abbey shares soared $7.375 to $35.25 on Nasdaq, while Homedco jumped $8.75 to $52.25, also on Nasdaq.

The restructuring of both firms would result in a one-time charge of up to $100 million, the companies said. About a third of their 470 branch offices overlap, but executives would not say what operations would be cut or if any of the more than 8,300 people employed by the two firms would lose their jobs.

“The consolidation of Abbey and Homedco into one enterprise will create economies of scale and efficiencies in field operations which will enable us to reduce costs while providing high-quality home care,” said Homedco Chairman Jeremy M. Jones, who would become chairman and chief executive of the new company.

Abbey Chairman Timothy M. Aitken, a British investment banker who steered the company away from near bankruptcy and then launched an aggressive expansion, would serve as vice chairman and president of the merged firm.

Aitken’s “mandate has been to turn things around and he has done just that,” said Ann C. Logue, a specialty medical products and services analyst at Volpe, Welty & Co., San Francisco-based brokerage.

Under the tax-free merger agreement, each Homedco share would be swapped for two shares of the new company and each Abbey share would be exchanged for 1.4 shares of the new company. The companies expect the merger to be completed by July upon shareholder approval.

Most of the companies’ employees are involved in supplying home medical equipment and a variety of treatments, ranging from physical therapy to intravenous nutrients and medication. Both firms, which work primarily for managed-care health plans, are also expanding programs to treat specific diseases or medical problems, such as asthma and HIV.

“They are able to serve almost anybody anywhere in the country,” said health care industry analyst Joseph D. France at Merrill Lynch Research.

Whereas Homedco has expanded rapidly through acquisitions with little problem, Abbey has had a tougher time. The company came under heavy criticism by analysts and shareholders for paying too much for Total Pharmaceutical of Torrance, which it acquired in 1993 for $197 million.

Abbey’s management ranks were rocked last year as the president and other top executives who joined the firm as part of the Total purchase were subsequently ousted. Then, last month, concern arose over the way Abbey had accounted for the debt it took on during its corporate buying spree. The company stretched out the acquisition costs over a longer-than-normal period, some analysts said.

But the company’s outside auditors found no problem with the practice and neither did Homedco, according to Homedco’s chief financial officer, Lawrence H. Smallen.

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Creating a Giant

The merger of home health care companies Abbey Healthcare Group Inc. and Homedco Group Inc.--both based in Orange County--would create the nation’s largest home health care provider. A brief look at the companies:

ABBEY HEALTHCARE GROUP * Headquarters: Costa Mesa * Chief executive: Timothy M. Aitken * Employees: 3,800 * Major products: Provides clients with nursing, respiratory and infusion therapies, home medical equipment and a network of 230 pharmacies in 49 states. * 1994 revenue: $439.2 million * 1994 profit: $19.2 million * Earnings per share: $1.38 * Thursday stock price: $35.25, up $7.375

Revenue

In millions: 1994: $439.2

Earnings

In millions: 1994: $19.2

Note: Fiscal year ends: Jan. 1

HOMEDCO GROUP * Headquarters: Fountain Valley * Chief executive: Jeremy M. Jones * Employees: 4,568 * Major products: Provides respiratory care, home infusion therapy and home medical equipment out of more than 200 offices nationwide. * 1994 revenue: $523.5 million * 1994 profit: $29.8 million * Earnings per share: $2.23 * Thursday stock price: $52.25, up $8.75

Revenue

In millions: 1994: $523.5

Earnings

In millions: 1994: $29.8

Note: Fiscal year ends: Jan. 1

INDUSTRY GROWTH

Both the number of Medicare-certified home care agencies and industry revenues have grown steadily.

Number of agencies, in thousands:

1994: 15.0

Total industry revenue, in billions of dollars:

1994 (estimate): $20.9

Sources: Bloomberg Business News, National Assn. for Home Care, Omnicomp Group. Researched by JENNIFER OLDHAM / Los Angeles Times