Less Likely Kindred Bid Will Increase

Strange Tony,

Kindred Healthcare's stock price closed at $9.05 today, just above the takeout price of $9 per share announced December 19, 2017.  Over the last six weeks the stock rose as high as $9.825,  roughly 10% above the deal price.  At that point the buyers were betting on someone offering a higher bid or the current consortium sweetening their price.  This sentiment waned in the last week.

It's not clear how much shopping the Kindred board did before signing the deal with Humana, private equity players TPG Capital and WCAS, and a Canadian pension firm to sell Kindred for $810 million.

Curiously, seven Kindred board members have ties to private equity.  They are intimately familiar with private equity's desire to buy undervalued companies on the cheap.  That means greater profits on the flip.

Kindred board members know how private equity incentivizes executives and board members who bring them a favorable deal.  Board member Sharad Mansukani, M. D., is a senior advisor for TPG Capital since 2005.  He joined the Kindred board in October 2015.  While he abstained from voting on the sellout it's not clear what role he played on either side of the deal as it developed, as well as what role he will play for TPG post closing.

Kindred directors are familiar with the practice of investing minimal equity for maximum returns.  It's not clear how much of the $810 million will be from cash vs. debt.  Buyers will need to refinance Kindred's $3.2 billion in debt.  Oddly, Kindred will give Ventas an extra 10% on rent and an additional $5 million to keep quiet and not challenge the merger. 

Investor Brigade Capital believes the deal significantly undervalues Kindred based on management's representations in the Q3 earnings call.  The problem is Kindred executives consistently failed to meet their EBITDAR promises to Wall Street since buying Gentiva and Centerre.  Executives talked growth while they shrank the company. 

Moody's placed Kindred debt under review when the deal was announced.  Their analysis cited Kindred's "free cash flow of around $150 million and substantial cash balances, which Moody's anticipates will exceed $250 million by the end of 2017."

By the end of 2018 that amounts to $400 million in cash, nearly half of the $810 million purchase price.   Kindred's strong cash position makes the sale price even cheaper for acquiring firms.

Kindred executives drove down the value of the company from $1.7 billion (equity at end of 2016) to a mere $410 million (the buyout price less cash and 2018 cash flow).  How does a competent board reward an executive team that drove down equity by 76% so corporate raiders could take out the company at a deep discount?  It's visionary mismanagement.

Anonymous (still waiting for crumbs to fall from Kindred executives' table)