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Genesis, Skilled deal emblematic of post-acute care growth


By Bob Herman
Posted: August 21, 2014 - 6:15 pm ET
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The recently announced merger between Genesis HealthCare and Skilled Healthcare Group will create one of the largest post-acute-care companies in the country with $5.5 billion in pro forma revenue—and the transaction also may have an impact on another pending deal within the sector.

For the past several months, Louisville, Ky.-based Kindred Healthcare has attempted to take over Gentiva Health Services, a home-health and hospice operator based in Atlanta. In July, after rejecting repeated Kindred offers, Gentiva said a mystery acquirer—a “recognized owner, operator and investor in the sector”—had entered the bidding process. Kindred has since matched that bid in its ongoing pursuit of Gentiva.

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Modern Healthcare previously reported that several private-equity firms were viewed as likely candidates to be Gentiva's other suitor. One of those reported firms, Formation Capital in Alpharetta, Ga., owns Genesis.

If Formation is Gentiva's unnamed suitor, some financial analysts believe the Genesis merger will open up a lane for Kindred to complete its Gentiva buy.

“To the extent that Formation Capital is indeed the other bidder for Gentiva, we think (the Genesis-Skilled) news should improve Kindred's odds of winning the ongoing auction, as we believe it will be difficult for Formation to pursue two very meaningful and complicated transactions concurrently,” Susquehanna Financial Group analyst Chris Rigg wrote in a research note.

However, it's still unclear to what extent Formation has been involved, if at all. Genesis CEO George Hager Jr. said in an interview that Genesis “was not involved in any way” in the Gentiva bidding process, but he could not speak for the private-equity company. Formation did not return calls for comment.

Additional information about a potential Kindred-Gentiva deal has been limited. As is the norm in take-over battles, everyone involved is remaining mum.

A spokesman for Gentiva said the company would not comment on its two merger proposals, echoing what Gentiva CEO Tony Strange said in the company's second-quarter earnings call. Gentiva also said it would not comment on the Genesis-Skilled merger. Kindred did not respond to requests for comment.

Kevin Ellich, a senior research analyst with investment firm Piper Jaffray, said, at a minimum, the deals involving Gentiva, Skilled and Genesis demonstrate that post-acute providers are in consolidation mode. Private equity is likely to be involved in future transactions because the sector is offering attractive returns, he said.

“(Post-acute) companies have good growth profiles over the next five to 10 years, or even longer than that given the demographic tailwind,” Ellich said. Aging baby boomers will likely increase the use of home-health agencies, hospices, skilled-nursing facilities and assisted-living facilities.

In the Genesis-Skilled merger, Genesis HealthCare will own 74.25% of the combined publicly traded company, which will be headquartered in Kennett Square, Pa. Skilled Healthcare Group, backed by private-equity firm Onex Corp. and based in Foothill Ranch, Calif., will hold the remaining stake. Hager said over time, Formation's investors plan to reduce their ownership interest in the company, admitting that most private-equity investments “have a finite life to them.” Formation took Genesis private in 2007 in a $1.7 billion deal.

Genesis expects re-entering the publicly traded market will help its financial standing in the long run. “Being private has its advantages,” Hager said. “You're not in the public limelight. And you're not really scrutinized on a quarter-to-quarter basis by public investors. But on the other hand, I do think there are some limitations on your access to capital.”

Bob Fish, CEO of Skilled and the former CEO of Genesis, said the two companies had been in talks for the past five-plus months. Adding Skilled's West and Midwest facilities to Genesis' expanding portfolio was a major plus of the deal, he said.

Genesis had previously concentrated its business primarily in Eastern states. But its 2012 agreement to purchase Irvine, Calif.-based Sun Healthcare Group signaled a desire to reach more seniors in urban and suburban markets west of the Mississippi River.

“We obviously see scale as being very important moving forward,” said Fish, who will become a director within the new Genesis company but will not hold an executive role. “We also think it's very important to have a significant market presence in each of the locations where we operate.”

Skilled's shares have been trading around $7.15, up more than 16% since it disclosed its plans with Genesis.

Follow Bob Herman on Twitter: @MHbherman


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