Novacare Ponders Turning One Company Into Two Wall Street Likes The Idea. The Stock Has Suffered Because Of The Uncertainty Over Medicare Payments.

Posted: July 10, 1998

NovaCare Inc., which provides skilled nursing to the elderly and runs a string of rehabilitation clinics, is attempting to limit its exposure to Medicare and will explore breaking up the company.

In an announcement yesterday, NovaCare said it has hired two Wall Street investment bankers, Salomon Smith Barney and Wasserstein Perella & Co., to suggest the best ways to proceed.

``We've engaged two investment bankers to figure it out,'' Tim Foster, chief executive officer of the King of Prussia company, said. ``We should have a sense by the end of the summer.''

Foster said the company has decided that the Medicare segment and outpatient rehabilitation are separate businesses that must be advertised and managed differently.

He said cutbacks in Medicare reimbursement ``were certainly a consideration but not a primary consideration'' in deciding that the company should possibly be broken up.

NovaCare's stock price jumped 12 percent, or $1.375, to $12.625 on news that the company could be split.

For some time, analysts have said NovaCare stock has suffered because of the uncertainty over Medicare and its funding mechanisms. Cost-cutting related to managed care also has forced deep changes in NovaCare in the mid-1990s. NovaCare employs 17,000 nationwide and 1,500 in the Philadelphia region. Foster said he does not expect layoffs from the restructuring.

The company's therapists work on contract in 1,900 nursing homes, providing speech, occupational and physical therapy. NovaCare also owns a string of 950 patient-care centers where athletes, injured workers and others come for rehabilitation and therapy.

Foster said the Medicare-dependent skilled-nursing services for the elderly and the outpatient rehabilitation clinics, including those devoted to orthotics and prosthetics, could be spun off into separate companies, or broken off from the parent company in a ``carve-out.''

In a carve-out, the parent company issues new stock in a subsidiary but maintains control of its operations. NovaCare is a majority owner of NovaCare Employee Services Inc., an outsourcing firm that provides human-resources functions to small and mid-size companies. NES is the product of a carve-out last November.

NovaCare's skilled-nursing-care business in nursing homes, which derives about 80 percent of its revenue from Medicare, has been a source of concern for Wall Street, which views possible cutbacks and changes in the federal health-care system as a drag on NovaCare's profit and sales growth.

The federal government is implementing two changes this year in how it pays for medical services to stroke victims and others in nursing homes, hoping that a new payment structure will control Medicare costs.

Foster said he has been ``frustrated'' at how Wall Street has valued NovaCare on the stock market. He says the company's growth and profits are stronger than its stock price indicates.

NovaCare ``has been undervalued for a long time,'' said Sheryl Skolnick, analyst with BankAmerica Robertson Stephens, an investment bank in New York. She said splitting the company was a good idea: ``The sum of the parts is more than the whole.''

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