Top Two Gentiva Executives' Partial Windfall

StrangeTony,

Kindred Healthcare's partial windfall for Gentiva Executive Chairman Rod Windley and CEO Tony Strange will exceed $21 million.  There's another $19.5 million in golden parachute money for this pair.  Gentiva's top two will garner over $40 million with millions more available in bonuses, severance and performance cash awards.

The S-4 was posted on Kindred's SEC page on 11-21.  It has not yet been posted on Gentiva's SEC page, even though Gentiva shareholders must vote on the deal.  That fits given Gentiva's Annual Report to Security Holders has a place but no document was filed for the public to view.

Gentiva's top dogs have a massive payday coming.  Rest assured this will not be communicated from the top in an executive memo.  I doubt it will make Kindred's Badder Together publication.  

Anonymous (from Gentiva)

Kindred Borrows Big for Gentiva

StrangeTony,

Kindred Healthcare raised nearly $250 million for its acquisition strategy.  It issued roughly $100 million in stock and $150 million in tangible equity units.  Also, the company amended its term loan facility to pay a higher interest rate in return for relaxed debt covenants.  For a 0.25% interest rate increase Kindred's leverage can now be as high as 6 to 1.  That's 85% debt to 15% equity for the next six quarters.

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.

Anonymous (from Gentiva)

Gentiva Cuts Health Insurance Contribution for 2015

StrangeTony,

Gentiva's senior executives failed to inform employees of a 16% reduction in the company's health insurance contributions for 2015.  The health care company decreased the benefit by $25 per pay period, going from a $161 contribution in 2014 to $135 per pay period for 2015.  That's $650 less per employee on an annual basis.

The Riverwood Parkway knuckle sandwich continues for Gentiva employees.  Let's encapsulate the year:  no raises, PTO accrual schedule reduction of 40 hours , and a 16% cut in company provided health insurance benefit.  If this is the margin discipline that excited Kindred, it's an ominous sign.

Don't forget $10 million in executive bonuses are forthcoming!  Employees unwillingly contributed to senior leader financial engorgement via a reduced accrual schedule for paid time off.  We'll help out next year by picking up a greater chunk of health insurance.

What about any of this fits with two of Gentiva's stated values, specifically respect and teamwork?  Nothing but it confirms repeated "top dog" pandering to employees.  Money is the sole center of Gentiva, which makes the company soulless.

Anonymous (from Gentiva)

Kindred at Home's "Badder Together"

StrangeTony,

Kindred's latest missive for their home health and hospice workers rang hollow at our hospice. Our patients have noticed changes from Gentiva's return to hospice margin discipline.  They're learning to wait to get service, if they receive it at all.

Opportunities for employees don't mention competitive pay for employee skills and work performed.  Gentiva's eye on the bottom line meant no raises for years for most employees, regardless of how many times they pitched in to cover.

Gentiva CEO Tony Strange offered employees flowery words during quarterly earnings calls with Wall Street analysts.  His words were vacuous, having no substance in reality.  Kindred's off to a good start along the same lines with their regular communications.  The words sound pretty, but the context in which they fall is a garbage heap where Gentiva executives divide $10 million in bonuses and Kindred increases borrowings by 80% while federal reimbursement remains flat.

Bad - adjective
1.  of poor quality, inferior or defective
2.  not such as to be hoped for or desired, unpleasant or unwelcome

The math does not say better together, but a continuation, even acceleration of Gentiva's arc of employee abuse.  I propose they switch to Badder Together.  That would be more honest.

Anonymous (from Gentiva)

Kindred Executives on Gentiva Deal

StrangeTony,

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. 

Kindred Selects Gentiva COO for "At Home" Division

StrangeTony,

The latest reports from Kindred suggest more pain for our hospice.  Borrowings are now projected at $1.8 billion with a mere $200 million in equity.  That's 90% debt and 10% equity.  The $200 million in equity will cover deal (money changer) fees of $183 million with $17 million to spare. 

As for Q3 earnings Gentiva presented possibly the sparsest financial information I've seen from a public company.  Internally, senior executives prioritized hospice margin discipline over patient care and customer service.

My hopes for the slightest shift in priorities fell when Kindred announced Gentiva COO David Causby will become President of Kindred At Home.  The Kindred buyout looks to continue our heart breaking arc with two primary drivers, rising interest expense amidst flat federal reimbursement and no change in top hospice leadership.

It's going to be a great year for Gentiva and Kindred's top dogs and money changers.  Kindred CEO Paul Diaz will receive over $6 million in March 2015.  The rest of us likely face no raises (yet again) and fear of job loss.  Also, no word yet on those long promised hospice computers.  Diaz' $6 million payout is six months of Gentiva's capital expenditures in 2014.

We shall see what crumbs fall from the executive table.  I'll venture very few.

Anonymous (from Gentiva)

Bounty for Bagging Gentiva?

StrangeTony,

Kindred reported in an SEC filing that Kindred President Paul Diaz will get kicked further upstairs, placing him in Rod Windley territory as Executive Vice Chairman of Kindred's Board.  The company spelled out the arrangement which includes:

Within 14 days following March 31, 2015, the Company shall pay Diaz a cash payment in the amount of $6,011,244. 

I view this as a commission or bounty for bagging a reluctant Gentiva.  Diaz' $6 million payday equals six months of capital expenditures for Gentiva.

Recall Medicare just released its home health payment update for 2015 with an overall 0.3% reduction.  Hospice received a 1.4% increase effective October 1.  There's not much to trickle down between payouts to the big boys and greatly increased borrowings, which should cause interest expense to rise dramatically.

It's hard to believe Kindred could be worse than Gentiva's false-faced executives, but the structural nature of the combination could continue our hospice's pain.

Anonymous (from Gentiva)

Ruining Hospice One Management Interaction at a Time

Anonymous (from Gentiva),

Who turned hospice into a mere shadow of its former self?  Who twisted the love and caring of volunteer clinicians into massive profit oriented enterprises, where the greatest returns come from closing hospice sites or selling out completely?  This toxicity sprouted Generic Hospice blog with my heading:

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.

Hospice owners-investors include Kohlberg & company, Clearview Capital, Wellspring Capital Management, Pouschine Cook Capital Management, KKR, Fulcrum Equity Partners, GTCR, Sentinel Capital Partners, Summit Partners, GE Capital and Cressey & company.  The Wall Street Journal reported:

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. 

Hospice is actively dying.  For that, so many of us grieve.

StrangeTony