About a year ago, Manor Care Inc. was just another local stock bobbing along in the backwaters at about $7 a share, making no waves.
Now, the stock has jumped above $27 a share, and thanks to a 3-for-2 stock split in February, that $7 share of a year ago is now worth more than $40. (On June 16, the board of directors voted another stock split, 5-for-4, to be distributed Sept. 10 to shareholders of record Aug. 31. This will increase outstanding shares to 6,715,293.)
A merger with Quality Inns International, the seventh-largest motel chain in the United States, made the new Manor Care a $125 million lodging conglomerate and left it with $20 million in cash to spend on ambitious expansion plans. As an attention-getting exercise, the Manor Care-Quality Inns combination was an instant success.
It is also a singular success story for Stewart Bainum, the veteran Silver Spring builder and investor who is principally responsible for the development of Quality Inns and Manor Care -- which builds and operates nursing homes, hospitals and alcoholism rehabilitation centers.
From a small chain of nursing homes and motels in the early 1960s, Bainum's stake has grown impressively. Before last year's merger, Bainum owned 33 percent of Manor Care and 31 percent of Quality Inns. In the wake of the merger and stock split, he holds more than 40 percent of the combined company and is also its chairman.
Bainum's shares are worth approximately $60 million, based on Manor Care's price on the American Stock Exchange last week. (The Bainum name and fortunes are associated with more than just Manor Care. Stewart Bainum Jr., democratic delegate from Maryland's 20th legislative district in Montgomery County, used family funds to campaign -- unsuccessfully -- for Gladys Spellman's seat in Congress.)
Wheather the Manor Care conglomerate lives up to expectations depends on the outcome of its growth campaign in the motel business and the nursing home-health care fields. Company directors approved the expansion plans two weeks ago.
Quality Inns intends to nearly double its motel and hotel properties in five years. It owns 26 to 360 properties; the rest are franchises, run by independent owners who pay a fee to use the Quality Inns name and centralized reservations, advertising and purchasing services. The conglomerate plans to keep that ratio of owned and franchised properties and to expand both at an annual average rate of 17 percent.
In the first four months of 1981, 25 new franchise motel and hotel properties were added.
The expansion is designed to create a "critical mass" -- a chain of motels and hotels large enough to plant the company's name in the minds of frequent travelers and tourists, says Gerald W. Petitt, executive vice president and another Best Western transplant.
Quality Inns is investing $2 million in a new reservation network with new equipment that should be much less expensive than most competitors', the company says. Quality Inns will spend $1 million a year to promote new franchises, in effect returning part of the royalties collected from those new franchisees.
The competing motel chains "essentially offer the same thing -- name recognition, image, a reservation system and support systems out of headquarters," says Fred Mosser, of the consulting firm Laventhal & Horwath, a specialist in the lodging industry. "There isn't a great deal of difference. It's a matter of degree. The most important service is reservations, being able to feed customers in. If you can do that, you can justify the franchise fee." An owner of an existing motel pays $7,500 to join Quality Inns, while the fee for a property under construction is twice that.
The first step in the expansion was establishment of Quality Inns Inc. -- a wholly owned subsidiary of Manor Care that owns the 26 hotels and motels that belong to the company -- and another subsidiary, Quality Inns International Inc., the franchising division.
The final move is to divide the motels and hotels into three separate chains, based on the kind and cost of service. The existing Quality Inn trademark will remain with the midrange properties, which seek to compete with Ramada Inn, Howard Johnson, Rodeway Inn and Holiday Inn, the company says.
A new group of more expensive Quality Royale motels and hotels will cater to expense-account travelers and luxury tours, and will compete with Hyatt, Marriott, Hilton and Sheraton.
The Comfort Inns will be designed for family vacationers, senior citizens and others who watch their travel budgets. The chief competitor will be Best Western.
One major problem facing the expansion plans is that the lodging field is overcrowded.
"There is a lot of competition out there," says Mosser of Laventhal & Horwath. He says to achieve its goals, Quality Inns will have to take over competitors' facilities.
Another potential problem is that the number of tarvelers in the United States declined between 1979 and 1980. But this year, the number may return to where it was before the 1980 slide, company officials say.
One advantage Quality Inns will have is that its new management understands the competition. In December, Bainum cleaned out the executive ranks of Best Western International Inc., beginning with Robert C. Hazard Jr., its chief executive officer, and five of the rival's seven vice presidents. They were joined by important recruits from Ramada and Holiday Inns.
Under Hazard, Best Western ballooned from 800 hotels in 1974 to 2,500 last year, the pace that Quality Inns hopes to set in the next three years.
The prospect of a possible leap in Manor Care stock may have made it easier to get Hazard and his colleagues away from other chains. Hazard told an interviewer for The Arizona Republic that the job change last month involved a 50 percent salary increase, shares of Manor Care stock and a "chance to become a millionaire" if the stock's value increases as quickly as the motel chain is supposed to.
Manor Care's growth goal also approved by directors two weeks ago, is even greater than Quality Inns'. Manor Care plans an increase from 3,487 nursing home and hospital beads to 10,000 in five years.
Manor Care, which had a start as modest as Quality Inns', owns and operates 23 nursing homes, two alcoholic rehabilitation centers and one acute-care general hospital outside Dallas.
Two more alcoholic rehabilitation centers are under construction or development in New Orleans and Chester, Pa., and a new nursing home soon will be finished in Charleston, S.C. A second hospital will be built in Sugarland, Tex., near Houston, and the company has applied for certificates to build hospitals in a half-dozen other cities.
"The population projections for older people are really huge," says James H. Rempe, executive vice president. About 1.5 million elderly people live in nursing homes, he said, and the number is expected to be 3.5 million by the year 2000.
Lou Hannen, a specialist in regional stocks with Wheat, First Securities in Richmond, speculates that Manor Care will use the cash from Quality Inns' expanding franchise operation to speed the construction of new nursing homes and hospitals.
Rempe says that isn't so. "We expect the two businesses to stand on their own."
The merger between Quality Inns and Manor Care began with an offer from Manor Care in 1980 to buy up to 49 percent of the outstanding Quality Inns stock at $14.50 a share. About 40 percent had, in fact, been purchased when the offer expired in September 1980. Next, Manor exchanged shares of Manor Care for the remaining Quality Inns stock at a ratio of 71 Manor shares every 100 Quality shares, based on the prices of the two stocks.
Bainum's stock in Quality Inns was swapped, not pruchased, company officials note, and the net effect was the increase in his holding to about 40 percent of the combined company.
The merger cost Manor Care about $15 million, said Secretary-Treasurer James Radcliffe. The combined cash of the two companies is about $20 million, he said.
With the merger and the split, the amount of Manor Care stock in circulation increased to 5.4 million shares, more than twice the amount before the merger, making the stock available to a wider market.
Manor Care has come a long way since Bainum and his partners started the nursing-home chain in the mid-1960s with six units. In 1968, the other partners accepted Manor Care stock for their partnership shares, and the company went public a year later, raising $4 million from investors.
Manor Care acquired an additional 24 nursing homes, but the expansion created problems, and seven of the less profitable homes have been sold.
Manor Care's success has been based on attracting more affluent people to its nursing homes, said stock specialist Hannen. In a typical nursing home, two-thirds of the residents rely on Medicare and Medicaid to cover costs, and nursing-home profits from these patients are regulated.
At Manor Care, two-thirds of the patients are private and do not depend on government assistance.
Manor Care's success results from Bainum's perserverance, attention to detail and financial acumen, according to Herbert Colton, a Washington attorney who was one of Bainum's original business associates and is general counsel of the National Home Builders Association.
Colton says Bainum has pulled the firm through several crises during the past two decades.
One occured in 1979, when Manor Care attempted to acquire Hillhaven Corp., a nursing-home chain three times its size.
A bidding war developed between Manor Care and National Medical Enterprises, and both wound up with about one-third of the Hillhaven stock. Manor Care was faced with the prospect of having its cash tied up in a company it didn't control, Colton said -- until Bainum persuaded the competitor to buy out Manor Care's share of Hillhaven. b
"He simply faced them down, and they bought us out at a tidy profit," colton says.
Manor Care got $22.9 million with a pretax profit of $4.7 million in the 1979 deal. "It put us in the big leagues," Colton says. "I don't know anyone but Stewart --or someone in his league -- who could have pulled that off."