Back in December of 2017, Kindred Healthcare announced that it would be bought out by Humana, TPG Capital, and Welsh, Carson, Anderson & Stowe after months of acquisition talks. Facing a huge debt load (949.61 D/E ratio), challenging industry conditions, and uncertainty regarding federal support for Medicare and Medicaid (big sources of revenue for Kindred Healthcare), the company at one point had courted half a dozen private equity firms before agreeing to a deal with the consortium. With experts predicting minimal anti-regulatory concerns and the consortium achieving shareholder support, the deal is expected to close in the middle of 2018.
For context, Kindred Healthcare is a healthcare services company that operates hospitals and nursing centers. It focuses on providing long-term care for post-acute patients. It employs nearly 40,000 caregivers that serve on average 130,000 patients every day in 2,475 locations across 45 states. The company’s previous strategy of acquiring other businesses left it with a huge debt load, forcing it to sell off nursing homes to reduce the burden. In 2016, Kindred generated $7.2 billion in revenue, with $2.5 billion coming from its hospice care segment and $3.8 billion coming from its hospitals and rehab facilities. On the other hand, Humana is a health insurance company with over 13 million customers. Because Humana’s operational strategy revolves around keeping patients in lower-cost outpatient settings rather than in costly hospital beds, Kindred Healthcare’s assets are highly attractive. Specifically, the deal would improve Humana’s Medicare Advantage business, in which Humana gets fixed payments from Medicare for covering seniors. 65% of Kindred’s footprint overlaps with Humana’s Medicare Advantage business, meaning that the acquisition and resulting integrated strategy should produce cost synergies.
The deal would split Kindred Healthcare into two businesses: Kindred at Home (health and hospice) and Kindred Healthcare (long-term acute hospitals and rehabilitation services). Humana would take a 40% stake in Kindred’s home health, hospice, and community care business, while TPG and Welsh, Carson, Anderson & Stowe would take the remaining 60% stake in Kindred at Home and 100% ownership of the other half of Kindred. Humana has the option to purchase the remaining 60% stake in Kindred at Home. The company paid $9 per share, which represented a 4.7% premium over the previous day’s close. In aggregate, it paid $810 million in cash for the deal, or $4.1 billion upon assuming Kindred’s $3.3 billion of debt.
This deal reflects the broader industry trend of insurers pairing with healthcare services businesses to provide services at lower costs than hospitals. Recent deals such as CVS Health Corp’s acquisition of Aetna and Cigna’s acquisition of Express Scripts have set off the avalanche of healthcare deals that have occurred in the first half of 2018. UnitedHealth Group has also been integrating medical providers through its Optum unit. As the government continues to limit spending on healthcare, continued pressure and limited topline growth should continue to result in industry consolidation as healthcare companies seek to reduce costs. Rumblings of a partnership between Walmart and Humana have garnered attention lately, providing further indication of this trend.
It is the opinion of this author that the healthcare space will continue to present interesting deals. The healthcare system has suffered from inefficiencies for many years, and the recent M&A activity indicates that existing healthcare giants realize that there is value still left on the table. Perhaps, smaller players with more flexible operations could also fill in the remaining gaps in service, resulting in increased capital markets activity as they expand their businesses to invest in new operations. Ultimately, the healthcare space should be closely monitored in the coming years.