My Special Situations portfolio invests exclusively in special situations (surprising, isn't it?). And that's what we have in Extendicare (OTC:EXETF). The Canadian health care company is divesting its American unit via a sale or spinoff, and a decision is expected this month on which path it will take. So my Special Situations portfolio is buying in.
The business and special situation
Extendicare is a Canadian company that provides skilled nursing facilities and long-term health care in both the United States and Canada. While the Canadian unit is stable and growing slightly with very high occupancy, the American unit is hampered by governmental cost-cutting, lackluster management, and a toxic political climate. Nevertheless, we are all getting older, and health care remains an attractive cash flow business.
So this is a typical Greenblatt next situation. A divestiture of the American business would improve margins at the parent company and force the market to see the value that it is currently overlooking. But there's true hidden value in the American unit, too. It owns almost all of its real estate in an industry that misprices such owner-operators. The spinoff or sale of the unit should make that value apparent.
Looking at comparable companies, I see substantial upside in the American business. In fact, at today's price I think you're paying nothing for it. Meanwhile, the Canadian unit continues to pay out a 7% dividend yield, a dividend that was cut in May in order to be covered solely by the Canadian operations. It's still a bit unclear whether the company will be able to maintain this payout following the divestiture. It will be close.
On the most recent conference call management said that it expected to announce something by the end of the year. So the word could come at any time.
Foolish bottom line
So that's why I'm buying into Extendicare. I'll be adding $2,700 in shares to my Special Situations portfolio tomorrow. Like it? Hate it? Join me on my discussion board to hash it out.