ARV May Deal Crippling Blow to Takeover Bid

Embattled retirement home operator ARV Assisted Living Inc. is expected to deal a crippling blow today to the $313-million hostile takeover bid from Seattle rival Emeritus Corp.

With two court victories and a more powerful ally, ARV has assured itself of fending off Emeritus’ slate of director nominees and winning election for its candidates to the nine-seat board at the company’s annual meeting today.

It also can send Emeritus scurrying with a resounding vote from shareholders.

Emeritus said it will rethink its $17.50-a-share offer, which expires Friday, after evaluating shareholder reaction at the meeting.

“I think the whole thing plays out in the next few days to the next week,” said Raymond R. Brandstrom, Emeritus’ president. “We’re realists and we’re not going to waste our time if it’s not going to work out.”

Clearing the path for ARV today was an Orange County Superior Court decision Monday that rejected Emeritus’ request for a short-term injunction. The Seattle company had sought to rescind a series of deals, thereby reducing the stake of ARV’s major shareholder from 39.1% to about 16.6%.

The shareholder, an affiliate of New York investment house Lazard Freres & Co., had sided with ARV management’s efforts to resist the Emeritus takeover bid.

ARV executives were “ecstatic” about the court’s ruling, Howard Phanstiel, the company’s chairman, said in prepared remarks. Brandstrom said it “definitely” took the steam out of Emeritus’ effort.

However, ARV could still lose its independence. The Lazard affiliate, Prometheus Assisted Living LLC, has purchased more stock in the last week and now controls 47.9% of ARV. Prometheus and ARV directors and executives control 55% of the stock.

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In a separate federal court action earlier this month, Emeritus had won a court order halting ARV’s efforts to block the hostile tender offer. But ARV quickly appealed, and the U.S. 9th Circuit Court of Appeals reversed the ruling last week.

Brandstrom pointed out that the state court decision Monday simply maintained the status quo while the parties head toward a trial on the issues. An Emeritus victory at trial would not only undo ARV’s deals with Prometheus but also could cause a recount of votes for directors.

Should Emeritus, which owns 6.8% of ARV, gain a big following among shareholders in voting today, it could decide to extend the tender offer and take the state court action to trial.

Meantime, a special meeting of shareholders called by Emeritus and supporters is scheduled for Feb. 6. Originally, Emeritus had hoped to have a majority of shares tendered by then. Now, Brandstrom admits, it’s possible the meeting could be canceled.

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The battle started last year.

ARV, needing cash for its expansion plans, got an offer from Prometheus at $14 a share for up to 49.9% of the company--a $135-million investment. Prometheus picked up a 16.6% stake for $27 million.

But Emeritus offered $16.50 a share, or $210 million, and agreed to assume $91 million in ARV debts.

Upping the ante, Prometheus bought $60 million in ARV notes that could be converted to stock at ARV’s option. ARV soon redeemed the notes, eliminating the debt and boosting Prometheus’ stake to 39.1%. It is that arrangement that Emeritus is trying to unwind in its state court lawsuit.

ARV rejected the Emeritus bid, and a later one for $17.50 a share, because conditions attached to it made the deal questionable as far as ARV directors were concerned.

In October, ARV’s chief executive, Gary L. Davidson, quit unexpectedly. In documents filed this month with the Securities and Exchange Commission, Davidson’s reason appeared to be that he thought ARV should have negotiated with Emeritus.

Shareholders certainly thought the company should have started talks with Emeritus. They filed a class-action lawsuit in December over the failure to do so.

Davidson, however, still sided with ARV and recently agreed to sell his shares to Prometheus for $15.50 a share.

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As shareholders go into the meeting today, they will be voting with a new major player in Prometheus. But through the battle and the note deal, their company lost out on a big chunk of money.

Prometheus, which had originally agreed to give the company $135 million for almost half the company, has now acquired nearly as much as it intended but has given the company only $87 million. The rest went to existing shareholders like Davidson.

Emeritus’ tender offer, meantime, expires at 5 p.m. Friday, though Emeritus could extend it as it did last week.

Both sides in the takeover attempt had become increasingly strident as the annual meeting neared.

In letters to shareholders this month, Phanstiel charged that conditions attached to the offer would reduce the price to $15.60 a share and that Emeritus has “a history” of reducing prices it paid for purchases.

Conceding the election of directors, Brandstrom vowed in a letter to shareholders that “the battle is not over” and that the lawsuit it filed in Orange County will go on.

He pointed out that Institutional Shareholder Services Inc., a shareholder advisory firm, recommended the Emeritus deal, stating that it was “hard to reconcile” how ARV’s board judged $17.50 a share offered by Emeritus to be inferior to $14 a share that Prometheus paid.