Heritage sees 3x return in exit to Onex

After eight years and a bout with bankruptcy, Heritage Partners has sold Skilled Healthcare to Onex Corp., realizing a roughly 3x return on the investment.

After a roughly eight-year holding period, Heritage Partners agreed to unload its investment in Skilled Healthcare Group, selling the company to Toronto-based Onex Corp. in a $640 million (CDN$750 million) transaction. The deal results in a roughly three times return on invested capital for Heritage.

Mark Jrolf, general partner, Heritage Partners

While the story has a nice ending for the Boston-based Heritage, the investment was not without drama. The firm acquired the business in 1997 for $50 million, grabbing a roughly 50 percent stake in the company through a $14 million equity investment. The next year, the firm invested another $44 million to help subsidize a roughly $250 million add-on acquisition.

Soon after that, though, Heritage almost saw its stake in the company torpedoed by a change in the federal reimbursement program. In 1999, the federal government altered its reimbursement rates, sending the long-term care industry as a whole into a tailspin. Heritage’s investment in the business, which had originally been known as Fountain View, was also hit by a significant increase in costs, and by 2001, the company had filed for bankruptcy protection.

However, Skilled Healthcare was able to emerge from bankruptcy protection with Heritage’s investment in the company untouched, and the firm did not have to reinvest in order to pull it out of Chapter 11.

“The change in reimbursement was something that we had seen on the horizon, but we didn’t foresee such a significant rise in the costs associated with the business,” Heritage general partner Mark Jrolf told PEO. “But during the bankruptcy, we were able to increase cash flows and EBITDA. The creditors were paid in full and all of the shareholders were able to retain their equity.”

Following the emergence, Heritage installed a new management team, led by CEO Boyd Hendrickson. The company then went on to generate a roughly 21 percent gain in its three-year compound annual growth rate in profits, while its facilities grew from 50 to seventy.

Heritage also executed a dividend recap earlier this year, which was factored into its 3x return on the investment. 

Onex, meanwhile, will write an equity check of C$265 million for the purchase, which is coming out of its $2.1 billion private equity fund. The transaction is expected to close either by the end of the year or early 2006.

Credit Suisse First Boston advised Heritage on the sale. Choate Hall & Stewart acted as counsel to the sellers, while Kaye Scholer provided legal advice to Onex.

Skilled, which operates 70 long-term facilities primarily in the Western US, generated in excess of $400 million of revenue last year.