Inside the Kindred Deal…and Why It Makes Sense
Value Insights Series • Issue 5
As many of you have likely heard by now, on December 18, Humana announced an agreement to partner with private equity firms TPG Capital and Welsh, Carson, Anderson & Stowe (WCAS) to acquire Kindred Healthcare for $4.1 billion in a landmark transaction for the home health and hospice industry.
Under the terms of the deal, TPG and WCAS will acquire 100% of Kindred’s long-term care facilities while partnering with Humana to acquire the company’s home care and hospice division, formerly owned by Gentiva. Humana will continue to operate Humana at Home (formerly SeniorBridge) separately, at least for now.
Where it gets more interesting is in the deal structure for the home care and hospice assets (Kindred at Home). Initially, Humana will invest $800 million for 40% of what is now Kindred at Home, while TPG and WCAS will own 60%. However, TPG and WCAS will have the option to sell (or “put”) their 60% stake to Humana after three years, at a multiple of between 10.5x and 11.5x (depending on its achievement of certain value-based outcomes tied to clinical metrics). It’s assumed the private equity firms will exercise their option at that time, rounding out their exit.
Why it Makes Sense for Humana
Despite Wall Street’s tepid reaction to the deal (as of the date of this publication, Humana’s stock is down 3% since the transaction was announced), this transaction makes perfect sense for Humana. While their 40% share of Kindred At Home’s $2.5 billion in revenue barely moves the needle compared to their existing $54 billion, the deal will bring significant value in other ways.
“The combination of Humana At Home’s pursuit of improving care for seniors living with chronic conditions, in concert with Kindred At Home’s care delivery, will allow these important capabilities to create more effective care in a compassionate way for our members,” said William Fleming, Humana’s President – Healthcare Services. “We look forward to transforming post-acute care through a value-based approach that will deliver improved clinical outcomes, ultimately lowering medical costs. We believe this work will lead to reduced hospitalizations, reduced emergency room visits, and allow physicians and clinicians to extend their care all the way to the patient’s home.”
This is all about value. And it will bring significant value to Humana from a cost-saving perspective, as it will allow them to more closely manage their most frail (costly) client/patient population. The structure of the deal – buying 40% now and the rest later – also allows Humana to “dip their toe in the water” of Medicare home health, hospice and community based services, while allowing sufficient time to both learn this side of the home care business and take their time to thoughtfully integrate it with their other care providers. All while partnering with a growth oriented private equity partner.
Why it Makes Sense for Kindred
There are three main reasons this is compelling to Kindred: 1) It pays their shareholders a premium to Kindred’s recent share price; 2) It gives them a clean balance sheet and plenty of “dry powder” (cash from their equity partners) to do future deals, and; 3) It allows them to grow their core facilities-based business.
To expand on the first point, Kindred’s stock has underperformed since their acquisition of Gentiva. Perhaps they assumed better synergies with their facilities business that didn’t materialize as expected. Kindred stock was trading at approximately $23 per share just after the Gentiva acquisition closed in February 2015 and proceeded to nosedive to about $8.60 per share in the 12 month period after the deal was completed. It has never recovered. Since the announcement of the Humana deal, and as of the date of this article, Kindred’s shares have bounced back to $9.80 per share which, oddly, is more than the $9.00/share acquisition price – it will be interesting to see if something else is developing there.
Why it Makes Sense for TPG/WCAS
Private equity typically makes its money a number of ways, the primary being “multiple expansion”. They buy a platform and then subsequent add-ons for a weighted-average multiple of earnings (or EBITDA). They put them all together, grow the business, and typically sell in 3-7 years, for a much higher multiple than the weighted-average multiple they paid for their acquisitions. They use leverage to amplify their returns.
In this case, it appears the entry and exit multiples are roughly the same from the equity groups’ perspective. So they must be counting on significant growth, both organically — by leveraging Humana’s population health model, and WCAS’ Innovage private duty platform (acquired in 2016) — and through future acquisitions.
What this Means for the Industry
It will be interesting to see how this plays out. Humana is certainly leading the pack in terms of developing a well-coordinated, value-based, managed care model that others may follow – eventually. In the meantime, I expect we’ll see another major player looking for acquisitions – namely Humana or its new subsidiary. Kindred has been on the M&A sidelines for over a year, having not announced a deal since August 2016, so adding a well-funded, growth-oriented buyer will certainly help strengthen the marketplace for quality home health and hospice providers.