Sun Healthcare Group, Inc. Should Be Sold, Says Large Institutional Investor

NEW YORK, Dec. 12, 2011 /PRNewswire/ -- Clinton Group, Inc., the investment manager for Clinton Magnolia Master Fund, Ltd. ("Clinton"), one of the largest investors in Sun Healthcare Group, Inc. (NASDAQ: SUNH) ("Sun"), sent a letter to the Board of Directors of Sun to urge the Board to sell the company.

In particular the letter noted that:

• Clinton believes Sun is undervalued in the public markets;
• Clinton believes Sun has sufficient liquidity, could continue to successfully operate as a standalone business, and has access the debt markets for refinancing; but
• Clinton believes a sale today would maximize shareholder value because such a sale would likely yield Sun shareholders a price in the $6-8 range, given that the likely buyers could save substantial operating and back-office costs, trade at higher multiples, and have more scale than Sun.

A complete copy of the letter sent by Clinton to Sun is attached.

About Clinton Group, Inc.

Clinton Group, Inc. is a diversified asset management firm with approximately $2.5 billion in assets under management. The firm has been investing in global markets since its inception in 1991 with expertise that spans a wide range of investment styles and asset classes. Clinton Group is a Registered Investment Advisor based in New York City.

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[Clinton Group Letterhead]

December 12, 2011

Board of Directors
Sun Healthcare Group, Inc.
18831 Von Karman, Suite 400
Irvine, CA  92612

Ladies and Gentlemen:

I write on behalf of Clinton Group, Inc., the investment manager of Clinton Magnolia Master Fund, Ltd. ("Magnolia"), which is a significant owner of the common stock of Sun Healthcare Group, Inc. ("Sun" or the "Company").  Founded in 1991, Clinton Group, Inc. is a SEC Registered Investment Advisor with over $2.5 billion in assets under management.  Based on publicly available information, Magnolia is one of the top 15 shareholders of Sun. 

We are proud owners of the Company and believe the stock is significantly undervalued. The unexpected cuts to Medicare reimbursement rates have severely impacted the Company and its peers.  And while we believe that management responded briskly with a risk mitigation plan that has been effectively communicated to investors, the stock price continues to languish and fails to reflect the true value of Sun's operations.  We believe the time has come to sell the Company to a larger industry participant.

We have spent a considerable amount of time evaluating the liquidity position and debt covenants of Sun.  We have concluded that Sun maintains sufficient liquidity with its cash position ($91 million) and cushion in its 2012 covenants. We also believe the debt market is open to Sun for refinancing and that lenders (other than members of the existing bank group) would be willing to construct a senior debt deal with covenants that are substantially more favorable to the Company than the existing bank deal.

Nevertheless, Sun's stock price has fallen more than 75% this year and almost 10% since August 1, 2011, leaving the Company with a market capitalization of less than $75 million. At just 2.0x total enterprise value to 2012E EBITDA, the market is pessimistic about the Company's ability to achieve its projections and thrive as an independent company.

We are certain that the Company is more valuable in the hands of a larger industry player that can reduce overhead, lower operating costs and more effectively weather the dynamic regulatory and political environment. Moreover, most of the industry trades at a premium to Sun's 2012E EBITDA multiple, making a transaction with Sun (even at a significant premium to today's stock price) accretive, before any such cost savings.  We are highly confident that there would be substantial strategic interest in acquiring Sun.

Given the public market's pessimism, on the one hand, and the likely enthusiasm of strategic acquirers, on the other, we believe the best way for the Board of Directors to maximize value for shareholders is for the Company to embark on a targeted sale process, aiming to sell the Company in the first half of 2012. We expect that Sun and its shareholders could receive a price of $6.00 to $8.00 per share in such a transaction, given the likely buyer interest (and their trading multiples) and the opportunities for efficiencies.

Such a transaction would be great for shareholders and the Company's other stakeholders -- customers, lenders, vendors, and lessor, Sabra Health Care REIT, Inc. (NASDAQ: SBRA). [FN1] If, for example, an acquirer credited consensus EBITDA of $60 million for 2012, believed they could achieve $15 million in cost savings (25% of G&A) and paid a 3.3x EBITDA multiple (below the trading multiple of Sun's peers and below comparable precedent transactions on an EBITDA and EBITDAR-equivalent basis), Sun shareholders could expect $7.00 per share, a 123% premium to Friday's closing stock price.

The opportunity to sell Sun to a strategic acquirer is thus compelling. We do not believe that anything else that management and the Board might do is likely to return the stock to the $6.00 to $8.00 range for quite some time, if at all. We thus believe the Board should act immediately to hire an investment banking advisor and solicit interest through a targeted sale process.

We would be pleased to discuss our views further. Please feel free to reach us at 212-825-0093.

Sincerely yours,

//s//
Joseph A. De Perio                                         
Senior Portfolio Manager

//s//
George E. Hall
Chief Executive Officer

[FN 1: Magnolia owns stock in Sabra Health Care REIT, Inc.]

SOURCE Clinton Group, Inc.