Case study: Texas provider negotiates funding process during downturn

Legend Healthcare had a very solid business, and its founders had begun thinking about ways to cash out some of the value they'd built over the years. The thing is, they weren't sure whether a complete divestiture, financing or loans might make sense.

Unfortunately, as the company worked its way through the process of examining its options, the bottom fell out of the financial markets. But the San Antonio, Texas-based skilled nursing facility operator still managed to pull out a deal, thanks to its extremely thorough research process, the company's leaders told a conference session yesterday.

Legend CEO Doug Preston and President Martin Tomerlin--who spoke the HCap conference held yesterday and today in Washington, D.C.--described how Legend figured out what it wanted from a financial partner over the course of a grueling year of self-examination.

So intense was the process that the two leaders had little time to address operational issues during that year. In fact, many companies don't have the management resources to weather this period, noted fellow panelist Michael Froy, partner with law firm Sonnenchein Nath & Rosenthal LLP's Capital Markets Practice. "A lot of middle market entrepreneurs grossly underestimate commitment of management resources it takes to do this," Froy noted. "Sometimes the companies that are the best operators suffer. It's tremendously taxing."

To kick off the process of requesting proposals, Legend retained Denver-based investment bank Quadriga Partners, which walked Legend's leaders through a comprehensive research effort designed to prepare them for financing discussions. "These guys (Quadriga) came in and kicked our tires until we were sick of it and looked in places we'd never suspected were important," Tomerlin told the audience,"So, when guys from the finance companies did due diligence, there were no surprises. "

When Quadriga's consultants were satisfied that they knew everything they needed to know, they prepared a memorandum on Legend and solicited bids. Legend interviewed a full 24 proposals, cutting across everything from bank loans to leaseback deals to an outright sale of the company.

Then, Q4 2008 hit, and the bottom fell out of every deal they had lined up. "Nobody had any money any more," Preston notes. "The president of one REIT called us up personally to tell us that he couldn't help us, and he was really upset. But of course we weren't surprised."

Ultimately, though, Legend's internal due diligence process paid off. In July 2009, Legend was able to strike a deal with one of the partners it picked out during its research round the prior year. Legend closed a $55.5 million leaseback transaction which actually served its goals better than the original $100 million deal would have, Tomerlin said.

In the final analysis, things worked out because Legend invested the effort to find a partner it could trust, one that would deal with the company fairly and be a real partner, the two said. "Watch out for speed and greed," Preston said. "If you move to fast, or get greedy, it's a deal killer. It's critical to sit on the same side of the table."