Saturday, September 21, 2013

One Gentiva: One Wall Street


Gentiva catered to Wall Street in two acts this past week.  First, the company revised its executive incentive compensation plans to meet longstanding concerns expressed by the investment community.  Gentiva badly lost the last two proxy votes on executive compensation, the nonbinding shareholder "say on pay." 

Second, Gentiva executives called Wall Street analysts to announce the Harden Healthcare acquisition.  They made this call at 9:00 am Eastern.  Investment house analysts were able to ask questions about the deal.  Employees got the call at 11:00 am Eastern, where there was no opportunity for questions.

Analysts seemed excited about the deal.  While it improved Gentiva's national footprint for hospice and home health, it essentially was doubling down on Gentiva's current model.  Harden's Community Care, Medicaid Primary Home Care, division was sold as diversifying from Medicare, until one considers Medicaid sits within the Center for Medicare and Medicaid.  The feds pay roughly two thirds of Medicaid bills while states pick up the rest.

Gentiva's CEO Tony Strange and CFO Eric Slusser sold the deal as deleveraging.  They went on to say debt would be 5.1 to 5.5 times equity in the combined company.  Not long ago Gentiva violated debt covenant restrictions well below those levels.  This resulted in a significant payment to debt holders and ratcheting up Gentiva's interest rate to junk levels.

With an asset write down Gentiva's leverage ratio rose as high as 32.25, according to Y Charts.  That's rolling the dice in private equity like fashion.

For years Gentiva had twice as much equity as debt.  Debt ballooned when Gentiva closed the Odyssey Hospice deal with $1.1 billion in borrowings.

One Gentiva will exhaust $85 million in cash, borrow $270 million and offer $53.8 million in stock to buy Harden's home health, hospice and community care offerings.

Consider how Eric described Gentiva's leverage in this year's Q2 earnings call:

The company's leverage ratio for the second quarter of 2013 was approximately 5.1 compared to a maximum allowed level of 6.25. On a net basis, the leverage ratio was 4.1.
Tony offered this in the same call:

We're going to balance that with our debt structure and managing our leverage ratio, and we're going to manage that leverage ratio to a place where we're comfortable.
In the Q and A Eric stated:

I think an acquisition strategy could be a deleveraging strategy in this environment. 

Tony and Eric can call it deleveraging, but I don't see it.  Gentiva remains highly levered and dependent on one payer, Uncle Sam via Medicare and Medicaid.  There's also the risk of getting into a strained cash position.  The first quarter of the year is when the company's principal and interest payments are due.  Gentiva is often cash flow negative in the first quarter, then generates significant cash in the next three quarters.

Refinancing $585 million in junk debt will likely result in lower interest rates and some interest savings.  I'd venture it's not enough to offset $270 million more in borrowings.

Gentiva believes the Harden acquisition will contribute to earnings within the first year.  It remains to be seen.  This is the crew that thought hospice was home health and imposed the same operating and marketing strategies to disastrous results.  While they apologized to hospice marketers, they're yet to offer their regrets to Gentiva employees.  They did offer a video on restarting the hospice heartbeat, after tearing out our heart and stomping that sucker flat.

Anyway, there's much to celebrate in Atlanta, the site of Gentiva's headquarters.  Let's hope they don't mismanage this acquisition the way they did Odyssey.

In my community there are many great hospice nurses who'll never set their foot inside a Gentiva door.  A callous corporate did its part, but much is due to an Site Leader incapable of mentoring, but fully able to torment.  It's frightening to think how this person might traumatize any new Harden divisions put under their control. An endless series of corporate representatives repeatedly tell us how this person has their complete confidence and trust.

At One Gentiva, clueless is as clueless does.


P.S.  Gentiva's leverage at year end was 5.4 times equity.

No comments:

Post a Comment