Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) today announced that it proposes to offer, subject to market and other conditions, $1.35 billion of senior unsecured notes (the “Notes”) to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-United States persons in offshore transactions.
The actual terms of the Notes, including interest rate, principal amount and maturity, will be determined at the time of pricing. The Notes are expected initially to be issued by Kindred’s subsidiary, Kindred Escrow Corp. II.
The Company intends to use the net proceeds of these offerings, combined with proceeds from additional financing transactions, to fund the previously announced acquisition of Gentiva.Debt financing will be $1.7 to 1.9 billion according to corporate documents. Gentiva's senior executives will garner huge sums via golden parachute compensation, change of control agreements, severance agreements, ordinary course bonuses, transaction bonuses of $10 million, in the money options, restricted stock, deferred stock units and performance cash awards. It looks like Gentiva executive engorgement could easily eat up $50 million. That'll be the topic of my next letter.
Bad - adjective
1. of poor quality, inferior or defective
2. not such as to be hoped for or desired, unpleasant or unwelcome
Benjamin A. Breier - Kindred Healthcare, Inc. - President, COOMy take: Kindred was in house in Atlanta conducting due diligence when Gentiva enacted its latest expense slashing tirade. These cuts caused major disruptions in patient care at our hospice, yet Kindred executives cheered Gentiva's strong financial results. Flash back a year when Gentiva cited Harden's COO Chris Roussos as the key to successful integration. Roussos left a mere two months after the merger closed. Also, I believe it's a misnomer to call Causby a hospice expert, given his nearly exclusive home health background. Despite the company's operating practices hospice is very different from home health.
As you know then, last month we announced the agreement to acquire Gentiva. The transaction is pending various approvals, and we expect it to close in the first quarter of 2015. I’d like to illustrate some of what we believe are the compelling merits of the combination, and briefly review some of the highlights. The combination with Gentiva enhances Kindred’s industry-leading position as the nation’s premier post-acute and rehab service provider, and creates the largest and most geographically diversified home health and hospice organization in the United States.
It also expands and enhances our presence in 20 of the top MSAs in the U.S., and Kindred’s integrated markets, which will support better coordinated care with more efficient and cost-effective approach, an approach that we believe is strongly preferred by consumers and payers. The transaction diversifies Kindred’s business and revenue mix and delivers substantial cost and revenue synergies. Once the merger is complete, 50% of Kindred’s $7 billion in revenue will come from non-in-patient settings. Synergies expected to be north of $70 million at the end of year two of the transaction will be immediate — will be meaningfully accretive to our earnings.
The deal also enhances Kindred’s revenue and margin profile and margin growth profile. It increases financial flexibility, it lowers our cost of capital, it reduces our rent and CapEx as a percent of revenue, and it generates substantial free cash flows to quickly de-lever, while supporting a meaningful dividend. The Gentiva transaction combination creates significant value we believe for both shareholders of both companies through significant accretion and cash flow generation.
And so together with Gentiva we’ll have the scale, the technical capabilities and the geographic presence to provide high-quality integrated care to patients across the full continuum. We’ve been busy here and in the last few weeks we announced — since we announced the transaction, we’ve already made significant progress in planning the integration of our two companies. We have been hard at work planning our integration starting with the formation of what we call an IMO or an Integration Management Office.
Look, at the outset of this process we felt it was important to define clear operating principals that will guide our integration planning and execution, and we remain committed to our patients first and foremost, preventing disruption to their care while also focusing on protecting the targeted revenue streams, retaining key talent, meeting our reporting obligations, achieving the synergies we’ve laid out, and fully preparing for day one after the close. Our integration team comprises top talent from both organizations and we look forward to continuing to work closely with Gentiva to achieve a smooth transaction.
To that end this week, we also made an exciting announcement regarding Kindred at Home’s ongoing leadership. David Causby, currently Gentiva’s President and Chief Operating Officer, will become President of Kindred at Home upon closing of the acquisition of Gentiva. We’re thrilled to have such a strong leader with a proven expertise in home care, hospice, and community care leading this business as it goes through the transition. David’s deep understanding of Gentiva’s operations, people, and systems will be invaluable and we look forward to having him in his new role.
His presence will help to ensure a smooth transition and a successful integration and we think ultimately bring a higher level of certainty on achieving our cost and revenue synergy goals, and advancing this business going forward. Let me now turn it back to Steve and he’ll spend a few minutes discussing the financial benefits of the transaction, and our financing plans in greater detail. Stephen.
Stephen D. Farber - Kindred Healthcare, Inc. - CFO, EVP
Thanks, Ben. Under the agreement Gentiva shareholders will receive $14.50 per share in cash, and $5 of Kindred common stock, with a fixed exchange ratio of 0.257 Kindred shares per Gentiva share. The transaction is valued at approximately $1.8 billion including the assumption of debt. On a pro forma basis, the combined Company is expected to generate annual revenues of approximately $7.1 billion and $1 billion of EBITDAR including expected synergies.
The transaction is expected to be immediately and significantly accretive to Kindred’s pro forma earnings and operating cash flows exclusive of transaction and integration costs. In addition to the expected cost synergies of approximately $70 million ramping up over the two-year period post-closing, we also inspect to realize annual revenue synergies of more than $60 million over time.
I particularly want to call attention to Gentiva’s terrific operating results which they announced last night. Their performance is exactly what we had hoped for and counted on in the context of this transaction, and we have great confidence it will continue to track consistent with their guidance, which I’m sure most of you have seen they reconfirmed last night. Expecting adjusted EBITDA of $183 million to $195 million for the year, as well as revenue guidance of roughly $2 billion. This momentum bodes well for our combination and further validates and de-risks our acquisition thesis.
Together we will have $7.1 billion of pro forma revenue, $1 billion of synergized EBITDAR and roughly $640 million of synergized EBITDA, which represents an increase in EBITDA margin of roughly 150 basis points compared to Kindred’s stand-alone. I want to emphasize the extraordinary value this transaction creates for Kindred and Gentiva shareholders.
Starting with earnings, we expect this transaction to add roughly $0.40 to $0.60 of accretion to Kindred’s forward earnings on a run-rate basis, two years after the closing when the integration of Gentiva is complete. It’s important to note that that calculation already takes into account our expected increase in share count from our 64 million shares today to the expected 85 million shares post-closing. The pro forma snapshot of the combined Company is a compelling value proposition and we’re very excited about the significant accretion to our EPS and our preliminary view of the Company’s future earnings power.
We have obtained a fully committed bridge loan back stop from Citi and J.P. Morgan, and subject to market and other conditions intend to finance the deal by issuing $200 to $300 million in total of some mix of common stock and mandatorily convertible equity securities, issuing roughly $1.3 to $1.4 billion worth of bonds, and by drawing on our existing line of credit to fund the remaining amount. I would like to emphasize again our commitment to maintaining a moderate leverage profile. As we’ve said before we expect leverage at closing to be roughly 5.5 times adjusted debt to EBITDAR. We expect over two years to reduce leverage to the 5.0 times area or somewhat below, and we maintain our long-term leverage goal of leverage in the mid four times range going up or down a bit depending on opportunities within the business. And with that I will turn it back to Paul.
Paul J. Diaz - Kindred Healthcare, Inc. - CEO
Together with Gentiva we expect to deliver a 60 basis point improvement in revenue growth headed into 2015, and expand our EBITDA margins to 9% from 7.4% on a stand alone basis. We have also made significant improvement in our capital structure. Reducing capitalized lease obligations with more flexible debt and equity, positioning us for future growth with lower risk. Looking ahead, we are committed to grow and deliver — de-lever over time.
The combination of reduced lease exposure and improved cash flow as a combined company, puts us in a great position to generate free cash flow to accomplish both and return cash to shareholders through our recurring dividend. We expect to maintain, as Stephen said, net adjusted leverage of approximately 5.5% — 5.5 at closing, and de-lever quickly over the next two years to 5.0 or below. Finally, despite a difficult operating environment that featured sequential years of reimbursement cuts and change and a wholesale restructuring of our Company and capital structure we have continued to grow. And heading into the fourth quarter of 2014 are very excited about our future.
Within 14 days following March 31, 2015, the Company shall pay Diaz a cash payment in the amount of $6,011,244.
When hospice reverts to the lowest common denominator and leaders obsess about metrics, it's time to speak. Self-inflated leaders assume clinicians give until their backs break, given no raises for years. A clinical ladder is a rainbow’s pot of gold. Others have a sorrier job and must be motivated by money. Abysmal leaders dangle extrinsic rewards for admission, hiring and EDBITA targets. “Sign on” bonuses entice people into a poor work environment. Employees’ voice equals their raise, zero.Hospice became a business. Mission and service became words on paper, nothing more. You informed me of Gentiva CEO Tony Strange's confession earlier this year, before inking the deal that will make him over $50 million.
We all hope that will subside over time and we'll get back to focusing on the patient need, patient care and the industry will start to climb again.
Investments in home health and hospice services have been going through a phase of consolidation that saw the merging of operators and closing of branches that have lower profitability.Law and lobbying firm McGuire Woods wrote in a white paper:
Private equity investors have continued interest in the hospice sector, shifting the industry from nonprofit control to for-profit dominance. Between 2000 and 2009, 80 percent of new hospices that began participating in Medicare were for-profit. In 2011, more than 1.2 million Medicare beneficiaries received hospice services from more than 3,500 providers, and Medicare expenditures totaled around $13.8 billion. See MedPAC Report to Congress 2013 . Further, in 2011, 45.2 percent of Medicare beneficiaries who died that year used hospice services. See MedPAC Report to Congress 2013 . The hospice sector is benefiting from an aging population and remains ripe for consolidation, creating opportunity for investors to gain market share and make profits as the demand for hospice services increases. However, the significant increase in Medicare spending on hospice services caused t he OIG to focus on activities relating to hospice services in 2013, namely inspection of hospices’ marketing materials, practices and financial relationships with nursing homes. See Office of Inspector General, Work Plan Fiscal Year 2013 . Additionally, while there has been a steady increase in the percentage of Medicare beneficiaries who receive hospice services, the rate of increase has slowed. Among private equity funds, the number of mergers and acquisitions for hospice providers declined in the first ha lf of 2012 after seeing a substantial increase in 2009 - 2011. See MedPAC Report to Congress 2013 . Investment in hospice was present but slow in 2013. For example, Summit Partners, a private equity firm, acquired a minority interest in Heart to Heart Hospice in March 2013. We expect investment in hospice to continue at a steady pace, but it will likely not have the significant growth we expect to see in other sectors.The language of hospice today is that of Wall Street. Hospice pioneers and founders, those still living, must be appalled at the complete distortion of their vision and rue the deformation of the service they birthed. Plain and simple, hospice itself is on hospice. Teamwork has been replaced with autocracy. Genuine caring goes unrecognized. Surface level imagery is all that matters. Management offers flowery and fluffy language, but scratch the surface and staff hear leaders shouting shallow, hollow and contradictory messages.
Kindred sees Gentiva as a key element in the post acute care delivery in the United States. We provide service in 42 states. We take care of 110,000 patients on any given night. We have 46,000 of the most dedicated, most compassionate employees in the healthcare industry. And in order to position themselves as the leader in post acute care they need a platform for home health and hospice and community care like Gentiva. So the value that has been created for shareholders through this proposal is directly attributable to the people who are on this call and that is the real value Kindred sees in Gentiva.
I promise you this. We will keep you updated as plans and more developments occur. But as I sit here today I would expect this transaction to be buttoned up sometime after the first of the year.
We are going to be very diligent in that process (integration) to make sure that first and foremost we protect the assets that Kindred is buying, the asset being our people and our patients. We will continue to update you on a weekly basis.Gentiva has made our great hospice a shell of its former self. The first post merger announcement plan filed with the SEC was the creation of a $10 million executive bonus pool. Gentiva senior executives will make millions in multiple ways through the sale of their company.
We need all of you to focus on taking care of our employees and being proud of this transaction.
I want to echo what Tony stated. Each of you on this call are the reason why this transaction has taken place. Your commitment, your dedication through all the things, the headwinds we've been through; you've made Gentiva a great company and each of you should be very proud of your accomplishments.
The Company’s core management team (as determined by the Compensation Committee of the Company’s Board of Directors) will be eligible to receive bonuses from a $10 million executive bonus pool to be allocated at the sole discretion of the Compensation Committee. At least a significant minority of such bonus pool will be allocated to core management team members other than the Executive Chairman.As for employees (who created the value for which Kindred bid extra), we're to keep our head's down and slave away. There is no bonus pool for us.
In addition, subject to the sole discretion of the Compensation Committee, the Executive Chairman will receive for 2014 and 2015 bonus payments in the ordinary course (apart from the timing of payment), both of which will be payable on or before Closing. If these ordinary course bonus payments are paid to the Executive Chairman, the amounts paid will be in the discretion of the Compensation Committee but will not exceed $2 million for 2014 and $1 million for 2015.
We reduce our dependence on debt by adding more.Kindred will borrow between $1.3 and $1.4 billion to buy Gentiva. Gentiva currently has just over $1 billion in debt. That's a 30 to 40% increase in debt for the company, which will be rolled into Kindred at Home. Kindred executives would not give an expected interest rate to investment analysts in their recent call. CNBC's talking heads noted financial instability would increase interest rates. Kindred projects $183 million in deal fees.
We've had some rocky years. In this industry there's been a negative environment that's been out there in both the home health and hospice. We all hope that will subside over time and we'll get back to focusing on the patient need, patient care and the industry will start to climb again.
Kindred Healthcare Inc (NYSE: KND) priced a 9,000,000 share secondary stock offering at $23.75 per share. Buyers in that offering made a considerable investment into the company, expecting that their investment would go up over the course of time.Kindred stock closed at $20.04 on Friday, down $3.71 a share from the secondary.
I think they have done yeoman's work in getting out ahead of the costs on the cost side of One Gentiva. So I think from a cost perspective, I would tell you that we are where we expected to be or even further along from where we expected to be.
Karin Patrick of Roseville works for a small non-profit agency and it's not doing well. Patrick's hours were cut from five days a week to three. A colleague, however, was laid off.
So, Patrick decided to see what the state could offer her if she eventually gets laid off too. What she found was that she didn't have to wait, she could apply for benefits right now.
"That was a big surprise," she said. "I'd never heard that."
Lee Nelson of the state's Department of Employment and Economic Development - or DEED - said placards in workplaces describing unemployment benefits clearly say that you can get state help if your hours are reduced.
"I don't think in anyway it's hidden from people. You won't find it on a billboard anywhere," he said.
"I can't predict what they will do next. Um, but what I will commit to is that we will keep you informed. We will, um, uh, keep uh communication going through these types of calls, we'll keep communication coming in the form of um written updates, matter of fact uh, by the time we finish this call there will be a written update, uh, that'll go out to the whole company afterwards. So, with all that said, um, I'm, I'm feeling good about where we are, I'm feeling good about our results, I feel good about where we're headed. I feel best of all about the care we're providing to 110,000 patients tonight."--CEO Tony Strange 5-15-14
"We want to be transparent with our employees and communicate, keep you informed of exactly what's happening inside the company."--Executive Vice President & COO David Causby
"(With One Gentiva) we focused on putting our patients and employees in the center of what we do every day."--Executive Vice President & COO David Causby
I can't obviously comment on the Gentiva transaction specifically, other than that we continue to do our work and the Gentiva management team has been, you know, really good and forthcoming. They've obviously make a lot of progress here in the last couple of quarters, so that excites us and sort of reinforces the investment thesis as we see it. But, whether the investment thesis is through a Gentiva transaction or through other opportunities in the marketplace, as I referred to before, we just see tremendous opportunities to extend the recovery period, prevent re-hospitalizations and to get on the front side of care for the most critically ill patients in America, chronic patients. Those patients joining the Medicare program each day through home based models, through medical homes if you will. And there's an enormous opportunity also as we have a better dialogue about end of life care and the opportunities for palliative care through hospice and palliative care services. So a logical extension of our service continuum is home based care and home based care models.Gentiva is "just one path" in Paul Diaz's strategic and financially accretive future.
We view Gentiva and the other acquisitions in our pipeline today, you know as a great opportunity to really more aggressively grow.
It's about growth, capital deployment. And we see lots of opportunities in addition to Gentiva to grow, you know over the next several years.
1. We grow by shrinking.
2. We listen to our employees by not asking for their opinion, ignoring their words when offered anyway and by firing anyone who dares to speak out.
3. We invest in people who turn over quickly.
4. We show our value of staff by cutting positions and reducing hours.
5. We support employees dealing with stressful work by cutting the rate employees earn paid time off, hiding it deep in series of policy updates.
6. Our employees, our most valuable asset, get no raises most years
7. We take a long term approach by selling out to the highest bidder
8. We manage by whim & impulse, delegating blame when things go poorly.
9. We focus on the big picture by micromanaging.
10. We prioritize image management over substance.
11. Our Human Abuse Department is unparalleled and leaves high marks.
12. We provide exceptional service which is a best mediocre.
"One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It’s simply too painful to acknowledge, even to ourselves, that we’ve been taken. Once you give a charlatan power over you, you almost never get it back.”
In nominating Mr. (Tony) Strange for re-election as a director, our Board of Directors focused on his leadership and execution as our chief executive officer in growing Gentiva, his driving and integrating significant acquisitions by Gentiva and his setting and communicating the proper cultural and behavioral tone as important attributes and experience for his continuing to serve as one of our directors.
On or about June 19, 2014, the Company received a Civil Investigative Demand from the U.S. Department of Justice, Western District of Missouri, under the federal False Claims Act requesting complete medical records for 14 hospice patients and other documents of Hospice Care of the Midwest, L.L.C., a subsidiary of Harden Healthcare Holdings, LLC (“Harden Holdings”), for the period from January 1, 2009 through June 19, 2014. The Company is in the process of complying with the demand for documents and is cooperating with the investigation.What a difference ten days made in the telling of a prior story:
On or about June 9, 2014, Iowa Hospice, L.L.C., a subsidiary of Harden Holdings, received a Subpoena Duces Tecum (“Subpoena”) from the Office of Investigations, Kansas City Regional Office of the Office of Inspector General of the Department of Health and Human Services. The Subpoena requests complete medical records for 17 hospice patients and other documents of Iowa Hospice, L.L.C. for the period from January 1, 2007 through June 9, 2014. Harden Holdings is in the process of complying with the Subpoena and is cooperating with the investigation.
