Tuesday, November 5, 2013

Wrecked Gentiva to Get New Paint


Gentiva held their earnings call today.  Gentiva CEO Tony Strange encouraged Wall Street analysts to look at this shiny new Harden acquisition and pay little attention to the company's subpar third quarter.  The crew of financial analysts seemingly bought into the Harden talk, treading lightly on Gentiva's deteriorating revenues and volumes.  It's clear investors didn't buy the spin, driving Gentiva's stock price down nearly 10%.  

Prior to closing the Harden deal Gentiva announced OneGentiva, where area and regional leadership, both sales and operations, support home health, hospice and community care services.  Strange indicated 100 field operating and sales positions were eliminated in creating OneGentiva.  These cuts should more than fund Gentiva's consulting deal with CapStar, Harden's former private equity owners.

OneGentiva's focus will be:
OneGentiva -  Key strategies shared in October
1)  Realign mission across all three divisions
2)  Redefine operating model and structure
3)  Improve hospice results
4)  Create a culture of field focused support for our corporate organizations
5)  Achieve sustainable growth in all of our businesses

Strange said something odd in his description of the new regional structure post Harden transaction closing.

"Harden's Chief Operating Officer Chris Roussos has been named the Regional President of our new South Central Region.  This region includes Texas and the majority of the current Harden geographies, thereby reducing the integration risk for most of their existing businesses."
Does that raise the integration risk for Gentiva operations in Harden territory?
As for Gentiva Hospice branches:

"We are going through each and every branch, evaluating the rate reduction models for 2014, the impact of overlapping territories and our ability to create market density.  As a result, we have or will be consolidating branches, as well as exiting certain markets and/or certain business offerings where it is no longer feasible to fulfill our commitment to our mission.  We expect the majority of this work to be completed in the remainder of this year."
Tony Strange beat the "hospice marketing equals home health marketing" drum for nearly two years on investor calls.  When hospice volumes didn't go up as predicted, Strange finally admitted they weren't the same. Yet, the OneGentiva reorganization includes:

"Each region will have a single-sales organization focused on the delivery of a unified comprehensive service offering to our referral sources. However, the product delivery systems for the 3 business lines will continue to function separately as they do today."
If Gentiva hadn't unlocked the key to hospice marketing as a stand alone group, how will it do so in a unified offering?

Gentiva refinanced existing debt and added more to fund the Harden deal:

Our blended interest rate based on outstanding balances on the term loans at closing came down from 6.45% to 6.36%....  The first principal payments on the term loans are due in March 2014.
Gentiva added debt to buy Harden, which CEO Strange admitted came at a premium price.  This small break in the interest rate cannot compensate for the hundreds of millions of new debt financing.  Gentiva previously had a cash crunch around principal and interest payment time.  How will things look come March 2014? 
On an annualized basis, Harden-related synergies are expected to be approximately $28 million by 2015. This includes approximately $16 million from the elimination of overlapping corporate costs, and the remainder from the consolidation of regional area and branch organizations, as well as other cost-savings initiatives 
More jobs are at risk for current Gentiva/Harden employees.  It goes beyond the 100 operating and sales positions.

As you would expect, with the Harden acquisition integration, branch closures and consolidation and our One Gentiva initiatives, there will be a lot of moving parts in the fourth quarter. The final results for the fourth quarter of 2013 will be subject to a number of factors, including the impact from additional closed or sold locations, the timing of branch consolidation, the timing of synergies, the timing of One Gentiva initiatives, the final results from the Harden business valuation and the balance sheet accounting treatment of various items related to the Harden consolidation.
It remains to be seen how quickly the axe falls.  Will Gentiva fire more employees between Thanksgiving and Christmas?  Might some chose to leave first?  Watch the moving parts.  Beware what drops from above, like manipulation schemes.

The alignment of the incentive plans in each market between operations of home health and operations of hospice and community care, I think, will be the last component to really try to marry those businesses up in the individual markets.

When people don't have good work to do, they must be bribed to perform.  I hope Generic Hospice isn't as broken as Gentiva.    


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