Kindred offer for Gentiva signals start of post-acute care consolidation

Story updated with comment from Gentiva at 5:30 p.m. ET

Kindred Healthcare's unsolicited takeover offer for Gentiva Health Services is the first proposal to come out of a healthcare sector that observers believe has been ripe for consolidation.

Post-acute-care operators have struggled over the past several quarters to meet earnings forecasts amid reimbursement cuts. Home health operators in particular are currently in the first year of 14% rate rebasing that will be phased in over four years. The industry also has faced heavy regulatory scrutiny as the Justice Department aims to cut down on fraud and abuse.

Kindred's $1.6 billion proposal represents a 64% premium to Gentiva's closing share price Wednesday. The $14 a share offer is split between cash and stock, but the Louisville, Ky.-based company said it is willing to negotiate an all-cash transaction. Gentiva's board had so far rebuffed Kindred's advances, according to correspondence between the companies that Kindred released Thursday when it took its offer to the company's shareholders.

Gentiva confirmed in a statement late Thursday that its board of directors had rejected the offer. The company has retained the law firm Greenberg Traurig and financial advisers Barclays Capital and Edge Healthcare Partners to assist in the review. Kindred's offer “significantly undervalues Gentiva and its attractive prospects for growth and value creation,” the statement said.

The proposed deal is part of Kindred's strategy to de-emphasize skilled nursing while putting greater focus on home health and rehabilitation. Atlanta-based Gentiva claims to be the largest home health and hospice provider by revenue.

“The goal is primarily to create an ecosystem of delivery sites where we can create a continuity of care,” said Paul Diaz, Kindred's CEO. “This furthers our strategy and furthers our goal to go deeper into home health and hospice.”

While acknowledging the sector's challenges, Diaz said that Kindred is already familiar with the rate rebasing and expects home health to gain further visibility as payment models encourage care in lower-cost settings. Moreover, “this is what patients want,” he said.

Gentiva already has a strong brand, said Benjamin Breier, Kindred's president and chief operating officer. Its footprint will allow Kindred to further expand its offerings across the country. Most notably, Gentiva has a presence in 21 of Kindred's 22 integrated-care markets, allowing it to expand its capabilities in integrated-care delivery.

Kindred is projecting $60 million to $80 million in synergies (PDF) from the deal. In the first year, about $40 million in synergies will come from cutting selling, general and administrative expenses as well as refinancing Gentiva's debt, Breier said.

Over the following year, there will be opportunities to reduce contract labor costs and further build out Kindred's “Continue the Care” program, which moves patients from acute-care hospitals into lower-cost settings, he added.

Analysts generally supported the deal, pointing out that Gentiva's debt burden has inhibited its growth and that the offer price is fair based on current reimbursement challenges.

Sheryl Skolnick, an analyst at CRT Capital Group, called Gentiva's rejection of the offer a “meaningful error on management's part,” writing in a research note that “our long experience tells us that it would take (Gentiva's) management a very long time to create that kind of increase in value.”

Shareholders similarly are likely to put pressure on Gentiva's management team to accept the deal, given the recent volatility in the company's share price, wrote A.J. Rice, an analyst at UBS.

Dealmakers have been predicting consolidation in the post-acute care sector for some time. Most recently, there have been suggestions that Amedisys could be a takeover target after the company replaced its long-time CEO and hired a consulting firm to help turn around its performance.

The five largest home health companies can be rolled up for about $2 billion, pointed out James Forbes, vice chairman at UBS Group Americas, on a recent Nashville Healthcare Council “Financing the Deal” panel.

“The home health industry does not have an effective lobby,” he said, adding that states also are putting pressure on skilled nursing operators. “I don't think (the knife) has fallen far enough.”

Follow Beth Kutscher on Twitter: @MHbkutscher