Extendicare to split Canadian, U.S. operations

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Extendicare Inc. has had it with the U.S. health care market.

After a rough year for profits and a resulting dividend cut, the company, which runs health care facilities, announced Tuesday that it would split its Canadian and U.S. operations in two.

However, no one knows exactly how the company will go about doing so. In a statement Thursday, Extendicare said it hired Citigroup as a strategic adviser late last year, and the investment bank suggested separating the two businesses. But management still hasn't decided on a final structure.

The two most popular options: sell the U.S. division, or put the Canadian and U.S. operations into two separate companies, and give existing shareholders stakes in both. A final decision is expected by year end.

Management is laying all the blame on a weak U.S. market. Just a week and a half ago the company slashed its dividend after promising last year that it would remain intact . When announcing the cut, management said the U.S. environment "has changed substantially due to significant reductions in government funding, increases in alternative care settings and increased regulation."

Not only was Extendicare hit with Medicare cuts last year, but the stalemate over the budget sequester produced even more cuts that went into place April 1. The company also said that the U.S. market has become extremely competitive, which makes profits harder to come by.

The reorganization wasn't an easy decision to make. The company's tried restraining costs and management refinanced more than $600-million in mortgages to save about $25-million a year in interest payments. But ultimately it wasn't enough.

Extendicare's earnings before interest, taxes, depreciation and amortization from its U.S. operation slumped to $23.5-million (U.S.) in the first quarter from $33.7-million in the same period last year.

The latest news sent Extendicare's shares soaring Thursday afternoon, climbing 15 per cent in just a few minutes. But it still doesn't bring the stock back to its level before the dividend cut. On the day it was announced, the shares plummeted 33 per cent.