Beverly gets competing bid, now risk arb play with bonds at parity; Northwest mixed on mechanics strike

By Ronda Fears

Nashville, Aug. 19 - Beverly Enterprises Inc. was primarily a risk arbitrage play Friday, with its convertibles hovering at parity, as Formation Capital came back to the table to make a competing takeover bid for Beverly against North American Senior Care.

Elsewhere, Northwest Airlines Corp. was on the radar screen as negotiations with its mechanics union trudged along in the face of a midnight strike deadline. Talks were going down to the wire, and the markets seemed to be in limbo for most of Friday, but onlookers said there seemed to be little hope that the strike would be averted.

Northwest's convertibles were mixed, and traders said hedged players were shorting the 6.625% issue while going long the 7.625% issue. The 6.625s dropped 3.5 points Friday to 47.5 against a 7-point gain in the 7.625s, one sellsider said. Northwest shares, however, closed off a dime, or 1.82%, at $5.38.

Formation fights for Beverly

Formation Capital, whose bid for Beverly Enterprises last December put the nursing home operator in play as a takeover target, is not giving up its courtship without a fight.

"The ending on this story has not been written yet," said a buyside trader.

The Formation group, which consists of Franklin Mutual Advisers, Appaloosa Management and Northbrook NBV, has topped a $12.80-per-share bid accepted by Beverly earlier this week from North American Senior Care. The latest Formation bid, at $12.90, beat the North American offer and Formation's original bid of $11.50.

The sale of Beverly has been anticipated for months, as the Fort Smith, Ark.-based company put itself on the auction block in March, but the North American price tag was a disappointment. On the North American bid, the Beverly convertible traded down about 6.25 points to slightly over parity.

On Friday's events, the Beverly 2.875% convertibles continued to linger in the area of parity while the underlying stock added 15 cents, or 1.18%, to close at $12.81.

As a risk arb play, the buysider said the spread was "really thin, but there's not much else to do with this."

Round two for Beverly battle

Given that Beverly has weeded through several bids in recent months, onlookers say it would not be surprising to see another party bid for Beverly. Beverly said its auction process had resulted in 10 initial bids, from which the North American offer emerged and was accepted.

Beverly officials say the pact with North American is effective until Aug. 23, at which time it may be terminated. The company said it would work toward an agreement with the Formation consortium, given the sweetened terms.

"Under these circumstances, and consistent with its fiduciary obligations to shareholders, our board of directors has concluded that the terms of the Formation Capital consortium's proposal are superior to those in the [North American] merger agreement and has notified [North American] to that effect," Beverly said in a press release.

But, William Floyd, Beverly's chief executive, added, "Our board's receipt of the Formation Capital proposal does not preclude North American Senior Care from submitting a counter-proposal, should it wish to do so, by Tuesday."

Better not defined per se

Terms of the new Formation offer were described by Beverly as "substantially equivalent to and in certain respects more favorable" than North American's, but no specifics were provided.

Under the North American bid, $320 million of the purchase price would be equity from a private investor group, $1.325 billion would be debt financing from Wachovia Bank and $550 million, operating loans from CapitalSource Financing LLC, the company said Wednesday.

North American is an entity that was created for the Beverly transaction. The company has declined to name its principals except for New York real estate attorney Leonard Grunstein of the firm Troutman Sanders LLP.

According to papers filed with the Securities and Exchange Commission, it could cost Beverly as much as $60 million in the way of a break-up fee if it terminates the agreement with North American.

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