Saturday, November 8, 2014

Kindred Executives on Gentiva Deal


Kindred executives made the following remarks concerning Gentiva during their Q3 earnings call.  (Gentiva executives did not hold a Q3 earnings call):

Paul J. Diaz - Kindred Healthcare, Inc. - CEO
As promised, following several years of repositioning the Company, and working through significant regulatory change, the third quarter marked the commencement of the growth phase of our strategic plan. And as we announced, the signing of the definitive agreement to acquire Gentiva Healthcare Services. This transaction will solidify Kindred’s position as the nation’s premier post-acute health care service provider, with a diverse business and revenue mix.

We are encouraged by Gentiva’s strong results in the third quarter and look forward to working closely with the talented team at Gentiva to complete our combination. We will use the call today to discuss the Gentiva transaction and update you on our plans going forward.

Benjamin A. Breier - Kindred Healthcare, Inc. - President, COO

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.
My 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.

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.

My take:  The obsession with purely financial measures was a common theme on the call.  Leverage as a percent would be 550%, not 5.5% as stated by Diaz.  The aim is growth, something Gentiva employees know well.  Kindred's priorities are the same as Gentiva's: profitability first and foremost.  The rest takes a back seat.  This bodes poorly for dedicated employees and increases the risk of job reduction or outright loss.  Interest and executives need to be paid.  Kindred CEO Paul Diaz will be the $6 million man after the Ides of March in 2015.  The dark trajectory remains as Kindred-Gentiva lowers the hospice bar yet again. 

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