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  Extendicare Improves with Age

BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR

Wednesday Sept 7, 2016

One can't escape the truism that time marches on. The two of us have been writing this column for more than 15 years and though we weren't young pups when we started, certainly the idea of old age and retirement homes was far distant. With each day it moves closer.

Growing older had nothing to do with Benj's purchase of Extendicare Inc. in 2014 at $7.01. At that time, it appeared the senior care provider was moving in the right direction as it had announced that it was looking at “strategic alternatives.” Those are code words for a sale and normally it occurs at a premium to the trading price.

While the Canadian operations were operating reasonably well, the investment stateside was more akin to the foul smell of bedpans. The U.S. Department of Justice and the Office of the Inspector General of the U.S. Department of Health and Human Services were alleging that Extendicare had “provided worthless services and billed Medicare for medically unreasonable and unnecessary rehabilitation therapy services.” That is harsh!

While denying culpability, Extendicare ultimately decided to pay $38-million (U.S.) to wash their hands of liability and future legal costs to move on. It also persuaded the company to sell most of its U.S. operations and retreat to the safer market of Canada, while pocketing about $1.2-billion (Canadian).

Refocusing on Canada and avoiding costly litigation in the United States dramatically increased the security of this investment. The scrumptious dividend of 4 cents a month became more secure and the cash injection offered Extendicare the potential to expand. Revera was the first acquisition for $83-million, followed soon afterward by Empire Crossing Retirement Community for $20-million. Extendicare then added Harvest Retirement Community and two seniors' home from Brightwater Senior Living Group. Evidently, there was no grass growing under the wheels of this enterprise. Meanwhile, the organization is developing its own projects.

Just over a year ago, activist investor Oxford Park Group announced that it had bought more than 5 percent of Extendicare and were looking “to enhance shareholder value.”

It appeared that a costly, time-consuming proxy fight might be in the offing, but fortunately, an agreement was reached between the two parties and three nominees from Oxford were appointed to Extendicare's board. Shareholders can rest assured that Oxford does not want to see the same old, same old and will agitate to attain a higher share price. Whether this means that the health care provider will ultimately be put up for sale is unclear, but that option is likelier now.

While the price of Extendicare is about 20 percent higher than what Benj paid, it could actually be a better value today. The risk component of the equation has gone down significantly with the withdrawal from the United States.

Meanwhile, it appears reasonable that the stock price could double from here. The future market for the corporation's services is only increasing as the population ages. While there might be some better demographic plays out there, this one is very enticing.


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