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Seniors’ Care Inc.
Acquisition of Western Long-Term Care Homes Inc.
ACCO 435 Section B
Professor Leanne Keddie
Mercedes Chau 40026286
Noah Freedman 40007550
Patrice Gagnon 4006116
Narges Rezapour 40112538
Salem Tolouei 40012713
Table of Contents
1
Executive Summary……………………………………………………………………
3
Introduction……………………………………………………………………………..
5
Mission Statement……………………………………………………………………..
5
Vision Statement……………………………………………………………………….
5
Stakeholder Preferences………………………………………………………………
6
Problem Statement…………………………………………………………………….
6
Market Trends…………………………………………………………………………..
6
Porter’s Five Forces……………………………………………………………………
7
Industry Key Success Factors………………………………………………………..
7
Competitor Analysis………………………………………………………………….…
7
SWOT Analysis…………………………………………………………………………
8
Financial Analysis………………………………………………………………………
9
Alternatives………………………………………………………………………………
11
Recommendation……………………………………………………………………….
14
Strategy…………………………………………………………………………………..
15
Implementation Plan…………………………………………………………………….
15
Conclusion……………………………………………………………………………….. 17
Appendices………………………………………………………………………………. 18
References……………………………………………………………………………….
37
2
Executive Summary
X Consulting Group has been assigned the responsibility to prepare a report for
Seniors Care Inc (SCI) on the potential acquisition of Western Long Term Care Homes
(WLT). The purpose of this report is to assess the “deal on the table” and to analyze the
impact it would have on SCI from a qualitative and quantitative perspective. The aim of
the report is to address the impact of post acquisition policies and to examine whether
WLT has proposed an acceptable purchase valuation of their company valued at $180M.
The scope of this report is to assess the current situation of both WLT and SCI, to evaluate
the senior home care industry, to perform a proper business valuation of WLT for SCI
stakeholders and managers, to issue alternatives based on the valuation, to provide a
thoughtful recommendation and lastly to determine how to efficiently implement said
recommendation.
After several years of consistent earnings SCI is looking to grow their company
and as of now operating within three divisions: 1) homes division 2) products division and
3) services division. SCI has experienced steady growth across their divisions as they
offer reliable services and products while creating and illustrating true customer value.
Their strong reputation and tactical strategies allows them to enjoy a 98% occupancy rate
across their homes. Despite their success, brokers have given SCI mediocre ratings
based on the lack of focus on one division. SCI is now looking to expand their division 1
operations by acquiring WLT whom in recent years has faced litigation settlements,
pending lawsuits and multiple accusations and complaints about overcharging their
customers. WLT fails to deliver on the value they promised their customers due to an
inexperienced workforce who are overworked. This is worrisome for SCI as in recent
years WLT has been tarnishing their reputation in the eyes of the public.
In order to properly address these issues, three alternatives have been proposed.
These alternatives analyze the impact on current share price and post acquisition
earnings as well as the implementation of industry average targets where WLT does not
meet them.
SCI should acquire WLT and invest in all profitable homes while selling off those
that are not profitable. With the sale of the unprofitable homes, SCI will be able to raise
capital to decrease their debt and invest some capital to meet industry average targets.
SCI will have to hire experienced workers to offer professional and premium services. An
initial marketing investment will be needed in order to prove to customers that true value
does exist in the products and services that they offer. The valuation of $180M made by
WLT is too high as after a proper valuation $125M was reached while noticing that WLT
is $1.54M below industry average in terms of revenue.
Another option would be for SCI to acquire all assets of WLT and take over all their
liabilities with a focus on increasing the occupancy rates by 278 residents across the
unprofitable homes. WLT’s sole reason for having unprofitable homes, according to SCI
management, is due to the occupancy rates. This will allow SCI to double their Senior
3
homes division (14 to 28 homes) without having the negative effects of the lingering
accusations and previous and pending lawsuits against WLT. SCI will have to brand and
market these homes as if they were their own as SCI has been able to prove to customers
that their products and services are valuable while WLT has not. This option poses a
revised net income of $21M after factoring in the $1.1M needed in training costs and
$1.7M for the termination of WLT’s management. There may be a potential backlash from
current caregivers and nurses as they will suffer a 5% reduction in pay to meet industry
averages.
If SCI chooses not to involve themselves with WLT, SCI should use their existing
systems and relationships to grow the business over time rather than rapid inorganic
growth. SCI will continue to pride themselves on providing top of the line products and
services while emphasizing the customer value SCI creates. SCI will have to build homes
in unexploited, lower competition areas across Canada. The major downside is
management wants to see immediate results rather than a progressive organic growth.
It is recommended that SCI acquires the assets and liabilities of WLT for $125M
($100M FV of NTA and $25M as goodwill) while focusing on increasing occupancy rates.
It will be financed majoritively by issuing bonds (debt financed 70%) and partially by
issuing shares (30%). This will increase post acquisition earnings and share price as it
has the highest net income of the three ($21M).
SCI will manage the potential backlash by emphasizing that the reduction in salary
will be matched by a reduction in hours so that the employees will not be overworked.
They will also receive paid training which is promising for employees whom plan to excel
within their profession. If the workforce is still not happy SCI is capable of firing employees
whom lack experience as they are not unionized. SCI will implement their own internal
systems, controls and strategies that have worked so well for them to ensure proper
handling of accounts and an increased occupancy of WLT homes. Although SCI plans to
release additional shares to finance the project, shareholders will be compensated by a
healthy net earnings (post acquisition) which in turn will increase their share price. Since
SCI plans to double their division #1 operations, they will need to allocate resources and
increase their focus which will show brokers that SCI is re-focussing their strategy more
towards a single division. Choosing this alternative will eliminate the risks that come from
acquiring WLT as a whole.
In the short run, SCI will implement stringent policies to meet industry averages.
In the long run, economies of scale will be used to increase margins while implementing
policies to increase medication division within the homes.
The purpose of this report was to assess if WLT should be acquired for 180M and
the impact it would have on SCI from a qualitative and quantitative standpoint. This
solution along with the proper risk mitigations and implementation will give SCI the rapid
growth they are seeking with additional future growth.
4
Introduction
X Consulting Group is responsible to provide a recommendation on the acquisition
of Seniors’ Care Inc. More specifically, X Consulting Group will provide a report on SCI’s
potential acquisition of Western Long-Term Care Homes Inc (WLT) currently owned and
operated by the Lair Family Holding Company. The purpose of the report is to analyze
the impact of the acquisition of WLT for SCI from both a qualitative and quantitative
perspective. The aim is to determine the acceptable valuation of WLT, the impact of postacquisition policies on WLT valuations, and to examine the $180 million valuation that
current owners of WLT have determined.
The report’s scope includes:
● Assessing current situation of WLT and SCI
● Evaluating the senior care home industry
● Performing a proper business valuation of WLT for SCI stakeholders and
managers
● Issuing alternatives based on proper business valuation
● Providing the best recommendation based on qualitative and quantitative data
● Determining a ten year implementation plan
Mission Statement
“At Senior’s Care Inc., we are focused on building valuable, long-lasting relationships
through multi-disciplinary offerings, catering to senior citizens for their every need. We
start the relationship by offering comfortable living conditions and expanding our services
to fulfill all their needs from quality medication to offering wide range of assistance. Our
aim is to be the only friend they will ever need.”
Vision Statement
“At SCI, we own and operate senior care homes. Through these homes we’ve built
peripheral product and service offerings for our seniors through production and sale of
medication as well as a multitude of services for their everyday need. Our vision is to
expand our customer base through the expansion of new homes and potential competitor
acquisitions. With more beds and high occupancy rate, we can increase our medication
production and expand our market share for senior care services. We want to be the
leading Canadian senior care product and service company.”
5
Stakeholder Preferences
SCI and the Lair Family are both stakeholders of the group. SCI is interested in a
proper valuation of the acquisition. All relevant data should be included in the valuation
as this will provide the best possible decision. SCI would prefer to pay the lowest price
possible for WLT; and it is assumed that SCI will want to pay special attention to
unfavorable data that can have major influence on valuations. SCI is also interested in
industry averages. A proper comparison to industry will be very important as well as a
reasonable analysis of impact on valuation as SCI will put a lot of emphasis on this data.
The Lair Family will want the highest possible price for WLT. They will put more emphasis
on positive data for their valuation.
Problem Statement
The problem statement that needs to be addressed is the following:
In a market dominated by large competitors and increasing consumer demand, is SCI’s
optimal growth strategy to acquire WLT based on their business valuation?
Market Trends (PESTEL)
In order for Seniors’ Care Inc. to adapt properly, it must analyze the market and
see which direction the market is shaping into. Out of the five major components of the
PESTE analysis (Appendix 1), Seniors’ Care Inc. should focus on the political and sociocultural factors. The industry must assess the government’s intervention, specifically the
amount of funding catered towards seniors. Currently, the government funding has been
reduced by $350 per client. Provincial health insurance plans under the Canada Health
Act receive little to no coverage, however other funding options include non-profit
organizations and private insurance (Comfort Life, 2019). In certain cases where seniors
rather live on their own, favourable tax credits apply for making changes to their own
homes (Government of Canada, 2019). Federal sources of monthly income such as CPP
and OAS are helpful in paying for care. However, elders admit that there is low financial
support provided by the government (A Place for Mom, 2019). Furthermore, this industry
must consider social factors, including the increase in aging population, currently at 17%
of the total population and the increase in waitlist for a room at a senior home
(Government of Canada, 2014). Technological factors should not be the main concern
of this industry, however it is an opportunity to consider in order to gain more assistance
with automated machinery, and lower the needs for nurses to better serve clients and
increase the bottom line (Aging, 2019). Currently, senior homes are not greatly impacted
by economic and environmental issues.
6
Porter’s Five Forces
Next, exploring each of Porter’s Five Forces (Appendix 2) helps analyze the
strengths and weaknesses of Seniors’ Care Inc position in the industry and how this
impacts their long-term profitability. The threat of new entrants is low because it requires
a high amount of capital and expertise. Overall, this helps reduce the level of competition
and threat of substitutes. There is low to medium bargaining power for buyers and
suppliers. The health industry has decreased in inelasticity for consumers because even
if patients are willing to invest in proper care and medical treatment (Babalola O, 2017),
seniors can only afford so much (Canadian Dimension, 2018). Healthcare expenditure
of Canadians has only increased from 44.3% to 46% within ten years (CIHI, 2018). More
specifically, depending on the patient’s age and needs, a senior will be ready to spend on
average $2200 per month (Claxton, Gary & Sawyer, Bradley, 2019). As for bargaining
with suppliers, there is the opportunity to earn favourable contracts because of the volume
of purchases needed for operations in the senior care industry. The above analysis
concludes that this industry is attractive because of the low competitive environment
excluding the high barriers to entry, which is actually favourable to Seniors’ Care Inc. and
other key players today. More specifically, this combination helps Seniors’ Care Inc.
decrease the number of entrants and face less competition in the current market. This
tool examines other factors that could impact the profitability of an industry.
Industry Key Success Factors
The senior care industry key success factors include having sufficient and qualified
personnel and the ability to provide a broad spectrum of care while being familiar with
customers taste and preferences. Having a competent and well-trained staff enables
companies to offer professional services. Lastly, it is important to reach a customer’s
standards by catering to their needs and offer a high quality of comfort within this industry
(IBIS World 2019).
Competitor Analysis
Without further information about the competition, it is assumed that key players
exist in the market. Given the fact that Seniors’ Care Inc. is a mid-sized Canadian
company suggest that there are bigger competitors. Specifically, having Seniors’ Care
Inc. acquire WLT shows that the company is eager to grow and compete with top
competitors in the industry. In order to stay competitive and expand, Seniors Care Inc.
must continue to differentiate themselves in terms of the quality of service offered.
7
SWOT Analysis
Furthermore a proper SWOT analysis (Appendix 3) will provide sufficient information to
assess the strengths and weaknesses of each company while exploring the opportunities
and threats that SCI faces.
WLT has 14 senior care homes, 11 of which are located in Western Canada which
allows them to have a strong presence within that part of Canada. They have
demonstrated throughout their existence that they have strong and reliable financials as
WLT has received an unqualified audit report every year that they’ve been in business.
Between four executives there is 46 years of experience demonstrating a highly
knowledgeable and dedicated BOD. Despite such experience being present within the
BOD, WLT suffers from inexperienced workers whom are overworked (customer value
not present, paying for superb care but receiving mediocre) and a presence of poor
internal controls of handling of accounts which has hindered their public appearance.
SCI is a publicly traded company on the TSX that has a market capitalization of
$154 million meaning it can obtain more capital resources from potential investors.
Current shareholders can play a key role on the board by overseeing managements work
and influencing strategic and operational decisions while ensuring objectives, which are
aligned with their interests, are achieved. This allows SCI to plan ahead to ensure
profitability and company growth. SCI operates over three divisions while maintaining
sufficient capital resources to allocate across all divisions. This indicates their ability to
produce consistent and stable earnings while diversifying their sources of revenue
indicating that if one division were to fail, SCI would still have two other divisions to focus
on and grow. Unfortunately, SCI’s stock has been given mediocre ratings by several
brokers which can result in disinterested investors.
SCI has been given the opportunity to double its division #1 operations with the
proposal of acquiring WLT whom is in need of liquidity in order to expand their favoured
division of sports-related businesses. With this knowledge SCI can have the upper hand
by using this to their advantage when negotiating the acquisition. SCI can also expand
into new business segments or even into a new industry that would compliment their
current divisions. This would diversify SCI’s portfolio and increase streams of revenue.
All of the above opportunities can be financed through the issuance of shares of equity
instead of debt. Revenues within the senior home care industry will decrease as
government is cutting funding by $350/patient which will not be matched by an increase
in cost to the customer but rather a decrease in revenues earned by the company. Given
the opportunity of acquiring WLT, SCI will face multiple threats such as the possibility of
losing a license and a potential tarnished reputation for acquiring a company which has
36 accusations of overcharging as well as other complaints and pending lawsuits. Another
red flag discovered by the SCI’s lawyers is that WLT paid an abnormally high amount to
8
settle a lawsuit which based on historical data has been settled for much less in the past
which raises the question; why was there an overpayment?
Financial Analysis
SCI must consider:
1. Financials of WLT in comparison to the industry
2. Business valuation of WLT
3. SCI’s
capital
structure
and
financing
1) Industry Comparison
Comparing key operational factors of WLT with the industry (Appendix 4) shows the
following:
● Based on number of residents, revenue is $15.4 million less than the average
revenue
of
the
industry.
● Contribution margin of WLT is 52.5% (Appendix 1), which is significantly less than
the industry (gov. code: NAICS 6233) at 83%. This indicates a negative variance
of
more
than
30%
for
WLT’s
contribution
margin.
● Salary expense for care workers and nurses is the most costly for WLT, consisting
of $97.9 million of direct expenses. Comparing this amount with the industry
shows that WLT’s salaries are $8.7 million higher than average. From this number,
$4.4 million is attributed to 5% higher salaries of workers and $4.3 million is the
variance in hiring more than the average number of workers per resident.
●
Advertising expense of WLT is $1.1 million higher than the industry’s average.
Based on industry comparison, WLT seems not operating effectively and efficiently.
2)
Business
Valuation
A) Tangible asset backing (TAB): WLT has a net book value of assets of $100.2
million (Appendix 5) in which SCI can earn if 100% of WLT is disposed.
B)
Capitalized earning method: normalized earnings of WLT includes factors such
as the reduction of government funding, potential lawsuit, management salaries,
and interest on the debt that has been exchanged with the redundant asset, all
totalling
to
$21.3
(Appendix
6).
C) The risk evaluation factors for industry and company specific are identified as
following:
9
Industry Specific Risk
o mature industry (positive)
o healthy industry (positive)
o increase in aging population by 56.7% from 2017 to 2050 (United Nations,
2017) (positive)
o increase in waitlist for a room at a senior home due to a shortage of supply
by 0.5% (Prime Corp, 2017) (positive)
o reduction in government funding by $350 (negative)
o health insurance plans receive little to no coverage (negative)
Company Specific Risk
o employees are not unionized (positive)
o solvency ratios better than average (positive)
o profitability ratios less than average (negative)
o not meeting industry averages for economy and effectiveness (negative)
o risk of complaints and threat to revoke of license (negative)
o ROI less than average (negative)
o half of homes are not profitable/excess capacity (negative)
o number of workers per resident is above average (negative)
o workers are not trained (negative)
Considering the discount rate determined by the given risks (Appendix 7) and
normalized earnings of WLT, a valuation range from $115.2 million to $136.2 million is
estimated (Appendix 8).
3) SCI Capital Structure and Financing
SCI currently has a debt to equity ratio of 37%. Although SCI is not focused only
on senior home care industry, two other divisions of medical production for seniors and
services to seniors, are closely related and bear almost the same market risk.
The average debt to equity ratio for the industry is 95%. One can see that SCI’s capital
structure is much less leveraged than average. It is inferred that there is an option for SCI
to increase its debt up to 95% of its equity (Appendix 9).
Alternatives
10
After assessing all internal and external factors, three alternatives have been
derived to solve the central problem. All alternatives along with a detailed qualitative and
quantitative explanation are explained in the following.
Acquiring 100% shares of WLT
Seniors’ Care Inc. should acquire 100% of WLT where it invests in all profitable
homes and sells the unprofitable divisions. With selling the unprofitable homes, SCI is
able to raise capital to lower their debt and choose to invest more money to reach the
industry’s average services offered. More specifically, SCI will invest in training workers
to offer premium service in order to raise the occupancy rates to 98%, matching the rate
that SCI was targeting from the beginning prior to acquisition. Currently WLT’s revenue
is under the industry’s average by $15.42 million, however focusing in marketing newly
acquired homes will target the proper market and prove customers that the product and
service offered are valuable.
By computing the business valuation, the total fair market value averages to
$125,667,221 million, which is less than WLT’s valuation of $180 million. Although it is
reasonable based on the comparison with TAB of $100,151,000, there is large debt
associated initially with the acquisition and certain qualitative factors that negatively
impact this option. Furthermore, WLT may not accept this acquisition since it is below
the expected amount. To explain more in detail, the advantages and disadvantages for
this alternative are outlined below:
Advantages:
● Greater market exposure and brand recognition
● Ability
to
lower
current
debt
with
profitable
divisions
Disadvantages:
● Requires a high initial and continuous investment
● Lacking expertise in acquiring a regional company with potentially different values
and ways of operating the business
● Big loss associated with the liquidation and sale of unprofitable divisions of WLT
● Negative reaction associated with the difference business valuations computed by
both stakeholder groups
11
In all, alternative one is very costly to implement and it requires significantly more
risk because of operating a bigger company. The growth potential is very high, however
the implementation of merging the companies together will lead to unguaranteed success.
Acquiring Assets & Liabilities of WLT
Another feasible and promising option would be to purchase WLT’s assets while
taking on their liabilities. Seniors Care Inc should then use their tactical positioning and
marketing strategies to increase the occupancy rates in the current unprofitable homes
that WLT will transfer to SCI. The sole reason WLT has some unprofitable divisions is
due to their lack of residents in some homes. This will allow SCI to increase their Senior
homes division by fourteen homes without having the negative effects of the lingering
accusations and previous and pending lawsuits against WLT. SCI will have to brand and
market these homes as if they were their own as SCI has been able to prove to customers
that the product and service that they are offering is valuable while WLT has not. Here
are a few advantages and disadvantages to pursuing this alternative:
Advantages:
●
●
●
●
Ability to increase occupancy rates by 278 residents in WLT’s homes
Mitigates the litigation risks and liabilities faced by WLT
Maintain SCI’s good reputation while doubling their division 1 operations
Revised net income of $21 million
Disadvantages:
● Increase in training costs by $1.1 million to properly train employees at the WLT
homes
● Potential backlash from current WLT employees due to 5% reduction in pay to
meet industry averages
● $1.7 million severance pay package to WLT management after termination of their
contracts
This alternative proposes a good solution for SCI as it allows them to increase their
operations and expand the size of their company without hindering their reputation in the
eyes of the public. Stakeholders will be content as the company is expanding in one
division increasing the focus of that division and annual net income is projected to grow.
Their may be some unforeseen difficulties in the meshing of the new employees to the
standards that SCI prides themselves on.
12
Opting not to move forward with WLT Acquisition
The third alternative is for SCI not to move forward with the acquisition of WLT.
Instead, the recommendation for this alternative is to maintain current operations and use
existing systems and relationships to grow the business at a slower but more manageable
rate. The current brand image of SCI is one of quality service and SCI values industry
standards which it maintains with its own operations. Instead of acquiring a company that
is in an unfavourable position relative to industry and trying to fix the company with a
heavy amount of management and changes to their operations, SCI can simply build
upon themselves. For this alternative, it is recommend that SCI acquire and build homes
in un-exploited, lower competition areas across Canada. This will require a lot cash for
initial construction and renovations of homes. However, because of SCI’s previous track
record in terms of profitability and customer satisfaction, it is reasonably assumed that if
the locations respond to the standards outlined above, SCI will be able to effectively take
advantage of the opportunity. The advantages and disadvantages for this alternative are
outlined below:
Advantages:
● SCI avoids the risks associated with the acquisition of WLT
● SCI grows using their established brand identity which is associated with a quality
service
● SCI builds on their existing operations, this approach is manageable for a relatively
small company like SCI
Disadvantages:
● The growth is at a much slower pace which doesn’t correspond with SCI’s vision
statement
● Doesn’t eliminate the need for cash as new locations will still need quite a lot of
cash
● Will require a lot of R&D to find exploitable locations in Canada
● WLT will remain a competitor and will also be open for acquisition from another
Senior Care company
● There is a lack of a new revenue stream, it will be hard for SCI to increase their
margins
Overall, this alternative is the best way to avoid the risks associated with WLT,
however, it does not correspond to the vision statement of SCI and will only provide a
business as usual approach for SCI, which the company has expressed a desire to
change.
13
Recommendation
SCI must buy the assets and liabilities of WLT. The valuation range of $115 to
$136 million is reasonable based on the capitalized earnings of WLT (Appendix 8). The
recommended price averages to $125 million, which indicates $100 million fair value of
net tangible assets (Appendix 5) plus 25% value of goodwill of WLT.
It is recommended that the acquiring price ($125 million) be financed 70% by
issuing bonds (debt-financed) and 30% by issuing shares (Appendix 9). This will lead SCI
to obtain an average debt to equity ratio of 0.95:1, similarly to the industry. After
acquisition, capital structure of SCI will be more leveraged and riskier. On the other hand,
there will be an increase in earnings per share. As a result, an increase in share price of
SCI after acquisition is expected.
SCI also needs to implement policies to increase the average occupancy rate of
WLT homes from 92% to SCI’s current occupancy rate of 98%. These policies must make
all unprofitable homes turn profitable. The recommended strategy map for this purpose
is presented in Appendix 8 and is discussed in the following.
Strategy
The recommended strategy for this acquisition is to buy assets and liabilities and
merge the two companies in order to use tax advantages and to avoid any contingencies
or potential liabilities.
A strategy to mitigate certain risks and strengthen weaknesses post acquisition is
to maximize profitability through customer satisfaction derived from the strategy map
(Appendix 10). The main weaknesses identified is the lack of training and controls. In this
strategy two main drivers should be considered in the learn and growth aspect:
1. Staff retreat and adaptive leadership in place
2. Care workers and nurses team training
14
Both drivers need to be empowered by effective supervision by upper
management and quality control procedures. Lean process mapping should also be used
to increase the value stream. By implementing these procedures, we can expect a
decrease in the number of errors and complaints and rather a bigger market for new
senior residents.
The strategy also recommends a negotiation for increasing care payments to
compensate government funding reduction, especially in higher priced areas. However,
it is highly expected for SCI’s competitors to have the same reaction. The financial results
are supported by the increase in occupancy rate and also by the increase in care home
revenue.
This strategy will help SCI to strengthen its operational weaknesses and also lead
to higher profit. Having an increase of 5% occupancy rate per home significantly helps
reduce the training costs of $1.1 million. There is the potential backlash from current WLT
employees due to the 5% reduction in pay, however working hours will be reduced in
order to compensate the overworked employees. Furthermore, extra non-monetary
benefits such as insurance, health, and wellness can be offered. While these benefits
work in SCI’s favour due to the fact that the company is part of the senior care industry,
this also enables workers to stay motivated.
Implementation Plan
Short-Term Plan
Buying WLT assets and liabilities is advantageous because it already has an
established customer base, a good reputation and experienced workers. SCI must follow
the following steps based on our recommendation provided within the first year.
1. Hire a broker (first month): WLT is valued at $180 million, which is more than the
amount computed by SCI. An independent appraiser helps both parties evaluate
the fair market value of WLT at acquisition date and reduce bureaucracy
throughout the purchasing process by several months. A full appraisal procedure
will
cost
$25,000
(Schroeder
Steven,
2018).
2. Take a closer look (third to last month): SCI’s banker, accountant, and attorney
play a vital role in due diligence, where the verification of all relevant information
about the business is being taken under consideration. Professional fees of $6.5
15
million (legal fees equal to 5% of final sale price and accounting fees totalling to
$250,000) associated with mergers and acquisitions can be capitalized (Kurman,
Offit,
2016).
3. Evaluate assets and liabilities (third month): Receive a list of all assets and
liabilities except cash and determine their classification, as well as revise the cost
of the asset or the value of the liability compared to the current value. This step is
important because findings from this evaluation can contribute to SCI’s negotiation.
4. Evaluate audited financial statements for the past five years (third month):
Despite the fact that WLT has always received an unqualified audit report, it must
evaluate and compare the financial statements to its tax returns.
5. Compare the indicators of WLT with industry average (fifth month): Since
WLT is not meeting industry averages, recognizing variances and determining how
to meet industry averages is important to determine future profit potential.
6. Assessing location and market area (sixth month): SCI has to consider the
location of WLT and the surrounding areas, including the economic outlook,
demographics,
and
competition.
7. Negotiating a fair price (eighth month): SCI is now able to determine the best
price for the assets and liabilities of WLT. It is estimated that SCI will acquire WLT
for
$125
million.
8. Restructuring (ninth month): Certain operating activities, specifically change in
management require immediate change. This will cost $1.7 million to terminate all
WLT’s management contracts.
Medium-Long-Term Plan
Major immediate changes are not suggested due to WLT’s negative employees
attitudes and unproductive management behavior. The main objective is to increase
profit and consequently the share price of SCI, while always closely following industry
standards. Therefore, the following activities would be suggested to achieve this
target during the next five years.
1. Using economies of scale and scope (first year): negotiate for lower prices (1520% less) with suppliers; effectively increasing margins for all divisions due to the
fact that SCI will have a greater total market share. This enables the company to
create bigger orders and contracts. Furthermore, synergy is formed between both
production and home care division with the acquisition of more homes.
16
2. Implementing policies and standards (second year): SCI management would
implement strict policies to meet industry average through improving the training
of workers by 20% and high quality control. Standardization of salary per nurse
and
care
worker
and
improving
the
quality
of
services.
3. Increasing revenue per resident (third to fifth year): Once improving the quality
of services, SCI should increase revenue per resident by 5% per year for three
years.
4. Revising unprofitable homes (fifth year): Revise and close down homes that
remain significantly unprofitable due to occupancy rates of less than 80%.
Furthermore, use income from profitable homes to salvage break-even homes by
investing in marketing, as well as improving in product and quality of service.
Conclusion
In conclusion, WLT’s approach to sell the business has given the opportunity for
SCI to expand. With extensive quantitative and qualitative measurements, purchasing
WLT’s assets and liabilities as well as increasing the occupancy rates of unprofitable
homes is SCI’s best option. Avoiding a high initial capital investment will enable the
company to grow at a slower pace and therefore decrease the company’s risk by
implementing specific projects as mentioned above throughout the next five years.
Appendix 1: PESTE
17
Political
● Decrease in government funding of 350$ per client
(Western Long-Term Care Homes Inc. Exhibit 3)
● Seniors (65 years old and older) receive financial
assistance (Government of Canada, 2019)
● Multiple safety regulations in the Healthcare sector
● Provincial health insurance plans under the Canada
Health Act receive little to no coverage, but there are
some help available in certain situations depending on
the province you live in. (Comfort Life, 2019)
● Funding options: government, non-profit organizations,
private insurance, and yourself (Comfort Life 2019)
● Favourable tax credits for seniors to making changes
to their homes (Government of Canada, 2019)
● Federal sources of monthly income that can be helpful
in paying for care include: CPP, old age security (A
Place for Mom, 2019)
Economic
● Canada’s facing a recession (higher job loss, falling
incomes and less consumer spending) (Quilty, 2011)
● Losing jobs can force elders to retire earlier (Quilty,
2011)
Social
● Long waitlist (increasing demand) (Prime Corp, 2017)
● In 2016, 2.2% of the overall Canadian population were
85 and older (Comfort Life, 2019)
● By 2030: 23% of the overall Canadian population will
be a senior (Comfort Life, 2019)
● 2018: 17% of the total population over 65 (Government
of Canada, 2014)
● From 2017 to 2050: 56.7% increase in aging population
(United Nations 2017)
Technological
● Increase in tech leads to more automated machines.
More assistance gives the opportunity to replace
employees, which leaves nurses more room to better
serve clients.
● Higher attraction and services lead to higher sales
opportunity with advanced products (virtual/robot
assistants)
● Health issues are relieved with advanced patches and
implants (Aging, 2019)
18
Environmental
● Increase in pollution, poor air quality, and extreme
weather due to global warming all increases the risk of
illnesses amongst elders (EPA United States
Environmental Protection Agency, 2016)
19
Appendix 2: Porter’s Five Forces
Force
Level of
Threat
Comments
Barriers to
entry
High
● Entering into the market requires high amount of
capital and expertise.
Bargaining
power of
buyers
Medium
● While each consumer has their own preferences and
compare the services offered by each home, there is
a big waitlist and demand for senior homes.
● Today, the market is less inelastic, specifically where
consumers can only spend so much on their health
based on their retirement income, even if it is their top
priority (Babalola O, 2017).
Bargaining
power of
supplier
Low to
medium
● It is assumed that certain companies like Seniors’
Care, also manufactures and sells medical products.
● Senior home companies purchase either a large
quantity (i.e: beds) or a small quantity (i.e: certain
machines) of products from a supplier. Large
quantities give less power to suppliers while small
quantities give more power to the supplier.
Threat of
substitute
Low
● With the high level of expertise and unique services
offered by personnel, it is rather difficult to be
replaced.
● Seniors can choose to live on their own.
Competition
and rivalry
Medium
● There is the presence of key players and smaller
competitors.
● Since there is a high barrier to entry, competition is
medium.
● The industry raises the opportunity to merge with
other companies causing a shift between
competitors.
20
Appendix 3: SWOT
Strengths
● Experienced management team (46 years total together
between 4 executives)
● Received yearly unqualified audit reports
● SCI is a public company as it is traded on the Toronto Stock
Exchange. Along with its market capitalization of over $154M,
it can obtain more capital resources from potential investors
and current shareholders can play a key role in the board.
They oversee management’s work, influence strategic and
operational decisions, all while ensuring that their interests
align and their objectives have been achieved. Essentially,
they plan ahead to ensure profitability and growth of the
company.
● It operates three divisions: Home division, Products division,
and Services division. Through different divisions, SCI can
obtain various sources of revenues and with 98% of
occupancy rate, it can maintain or continue to increase their
revenues. Additionally, if one division were to fail, SCI would
still have two other divisions.
● SCI has sufficient capital resource, enough to efficiently
allocate them across its divisions. In fact, stable earnings
have been stabled with over $13M from previous fiscal year.
● As average current ratio is slightly better, then it indicates that
SCI is able to pay its current obligations with its current
assets.
21
Weaknesses
● With its long-term debt and shareholder’s equity, its long-term
debt to equity ratio is higher than 1, indicating that the
company is largely financed through debt rather than equity.
SCI should achieve a balance as large debts can indicate
potential issues concerning with its payback and even more
so, in the long-term, going-concern issue should debt
continue to accumulate.
● Cannot control the BOD without encountering a large
settlement payment
● Several brokers have mediocre ratings on SCI stock, which
could potentially result in potential investors being
disinterested in investing SCI.
Opportunities
● Increase market share and increase revenues of SCI’s
division by increasing its number of homes.
● SCI can expand into new business segments or even in a
different industry, but that would complement its current
divisions. This would diversify its portfolio and increase
sources of revenues.
● Issuance of shares would allow the company to finance its
operation through equity rather than debt.
Threats
● Government cutting funding by $350/patient
● Potential loss of senior home licensing due to accusation of
withdrawing funds from residents trust account without
authority
● Settlement of painkiller lawsuit seems abnormally high
compared to historical cases. Such lawsuit can potentially
tarnish SCI’s reputation and result in higher costs.
● There are several problems such as complaints of
overcharging and other accusations could lead to
complications and reputation tarnishment.
22
Appendix 4: Industry Comparison
COMPARISON WITH
INDUSTRY
A) ADVERTISING EXPENSE
number of beds
4877
average advertising per bed
5000
industry
24385000
WLT
25512000
$
(1,127,000
variance
)
23
B) SALARIES- CARE WORKERS AND
NURSING
number of
residents
4502
salary per
resident
19813.33333
industry
89199626.67
WLT
97950000
$
(8,750,373
variance
)
if 5% variance be reasonable
93659608
WLT
97950000
$
(4,290,392
variance
)
C) REVENUE
24
number of
residents
4502
revenue per resident per
month
5000
revenue per resident per year
60000
industry
270120000
WLT
254701000
variance
$ (15,419,000)
D) CONTRIBUTION MARGIN
%
industry
WLT
https://www.ic.gc.ca/app/smepme/bnchmrkngtl/rprtflw.pub?execution=e1s3
>84%
0.52573017
25
variance
(>31%)
26
Appendix 5: TAB
TAB
METHOD
NBV ASSETS
101387
NBV
LIABILITIES
-44636
FMV
INCREMENTS
39000
FUTURE TAX
4400
TAB
$ 100,151,000
27
Appendix 6: Capitalized Earnings Method
NORMALIZED EARNINGS
NI before tax
$
32,430,000
interest on redundant asset debt
$
revenue loss due to gov. funding
$
(18,908,400)
extraordinary lawsuit*
$
9,750,000
CM due to increase in occupancy rate to
98%
$
8,128,191
advertising reduction to industry benchmark
$
1,127,000
wages and salaries reduction to industry benchmark
$
4,290,392
management salaries reduction to industry benchmark
$
training and supervision expense (our
policy)
$
(1,127,000)
NI before tax
$
35,505,527
Tax
$
14,202,211
Normalized NI
$
21,303,316
(394,656
210,000
28
* Not completely removed lawsuit, because 36 complaints are being dealt. However half of
this amount was unusual based on our lawyers' estimate.
29
Appendix 7 : Build Up Method and Business Valuation
MULTIPLIER BUILDUP
lower
higher
Risk Free Rate
1%
1
Public Market Equity Risk Premium
6%
6
Liquidity Risk
3%
4
2%
3
4%
5
private (negative)
100% ownership (positive)
Industry Specific Risk
mature industry (positive)
healthy industry (positive)
increase in aging population (positive)
increase in waitlist for a room at a senior home
(positive)
reduction in government funding
(negative)
health insurance plans receive little to no coverage
(negative)
Company Specific Risk
employees are not unionized (positive)
30
solvency ratios better than average (positive)
profitability ratios less than average (negative)
not meeting industry averages for economy and
effectiveness (negative)
risk of complaints and threat to revoke of license
(negative)
ROI less than average
(negative)
half of homes are not profitable/excess capacity
(negative)
number of workers per resident is above average
(negative)
workers are not trained (negative)
range
16%
1
Multiplier
6.25
5
31
Appendix 8: Capitalized Earnings Method
CAPITALIZED EARNINGS METHOD
Normalized NI
21303315.97
21303315
6.25
5.2631578
Multiplier
Capitalized Earnings
$
133,145,725
$
112,122,716
4,758,000
$
(1,725,000)
$
(1,725,000)
$
136,178,725
$
115,155,717
$
100,151,000
$
100,151,000
$
Additional debt available
4,758,001
$
Management termination settlement
Total Fair Market Value Range
a)
TAB
Gap between TAB and Capitalized
Earnings valuation*
0.35973405
0.1498209
* The gap is reasonable, because less than 35%
32
b)
EPS for SCI
0.8346760
Price of SCI share
estimated multiplier of industry by brokers*
5.9903479
*The range is reasonable, because this multiplier fall within this range.
33
Appendix 9: Capital Structure and Financing
FINANCING ACQUISITION
SCI
TOTAL ASSETS
$ 126,500,000
DEBT
$ 34,000,000
R/E
$ 48,000,000
S/C
$ 44,500,000
DEBT/EQUITY
37%
ASSETS ADDED BY ACQUISITION
$ 125,000,000
TOTAL ASSETS AFTER ACQUISITION
$ 251,500,000
34
INDUSTRY TARGET DEBT/EQUITY
95/100
251.5M=1.95X
X=
12897435
9
TARGETED DEBT
$ 122,525,641
TARGETED EQUITY
$ 128,974,359
FINANCED WITH DEBT
$ 88,525,641
71%
FINANCED WITH ISSUING SHARES
$ 36,474,359
29%
$ 125,000,000
100
%
TOTAL VALUE OF WLT
35
Appendix 10: Strategy Map
36
Appendix 11: GANTT Chart
Y1 Y2 Y3
Implementation of the recommendation
Negotiation with suppliers and formation of synergy
Implementation of certain policies to meet industry average,
improve workers training, and standardize salary of workers
and quality of services towards residents
Increase in revenue by 5% per year per resident
Revision of unprofitable homes (occupancy rates with less
than 80%). Invest earnings into marketing and quality of
service if needed to break-even.
37
Y4 Y5
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39
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