Kindred Healthcare acquired by Humana/TPG/WCAS: fairness opinion by Barclays and Guggenheim Securities
Announced December 19, 2017 · One-step merger · All cash ·
DEFM14A filed February 21, 2018
Hospitals Hospital: Specialty Sponsor: TPG Global, LLC; Welsh, Carson, Anderson & Stowe XII, L.P.; Humana Inc.
Enterprise value
$4.1B
EV / LTM EBITDA
8.0x
EBITDA $515M · 9% margin
EV / LTM revenue
0.68x
revenue $6.0B
DCF discount rate
8.5%–9.5%
Perpetuity growth
Deal terms
ConsiderationAll cash
Price per share$9.00
Premium4.7%
Premium basisclosing price of $8.60 on 12/15/2017 (last trading day prior to news reports of a potential transaction)
StructureOne-step merger
Termination fee$29.0M
Reverse termination fee$61.5M
Go-shopNone
Outside date—
FilingDEFM14A · EDGAR index
Implied value per share by method vs. $9.00 offer
Selected companies — EV / 2018E EBITDA (blended, applied to $515mm 2018E EBITDA) (Barclays) $6.96 – $19.42
Precedent transactions — EV / LTM EBITDA (as of 9/30/2017, excluding home health care and LTAC payment adjustments) (Barclays) $7.64 – $15.20
Precedent transactions — EV / LTM EBITDA (as of 9/30/2017, including home health care and LTAC payment adjustments) (Barclays) $-0.54 – $5.57
Discounted cash flow (Barclays) $0.31 – $7.02
Illustrative Potential Separation Costs (Barclays) $5.00 – $6.64
Historical Share Price Analysis (Barclays) $5.60 – $11.70
Research Price Targets Analysis (Barclays) $6.36 – $10.00
Illustrative Future Share Price Analysis (Barclays) $5.05 – $13.69
Illustrative Discounted Cash Flow Sensitivity Analysis (tax reform) (Barclays) $4.77 – $12.67
Illustrative Future Share Price Sensitivity Analysis (Barclays) $2.94 – $11.54
Selected companies — Overall reference range - Kindred management estimates (7.5x AEV/NTM EBITDAR to 8.6x EV/NTM EBITDA) (Guggenheim Securities) $4.68 – $11.73
Selected companies — Overall reference range - Wall Street consensus estimates (7.5x AEV/NTM EBITDAR to 8.6x EV/NTM EBITDA) (Guggenheim Securities) $5.96 – $12.65
Precedent transactions — EV / LTM EBITDA (change-of-control) (Guggenheim Securities) $5.62 – $14.25
Discounted cash flow (Guggenheim Securities) $1.40 – $10.34
Illustrative Discounted Cash Flow Analyses (Tax Bill Cases) (Guggenheim Securities) $5.24 – $18.21
Stock Price Trading History (52-week) (Guggenheim Securities) $5.50 – $11.70
Wall Street Equity Research Analyst Stock Price Targets (Guggenheim Securities) $6.82 – $10.00
Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.
Opinion of Barclays to the target board
Delivered December 18, 2017 · Fee $17.5M ($15.0M contingent on closing), $2.5M on delivery of the opinion
Discounted cash flow assumptions
Discount rate8.5%–9.5%
Basiscost of capital derived via Capital Asset Pricing Model
Terminal valuePerpetuity growth
Perpetuity growth1.8%–2.3%
Exit multiple—
Projection periodQ4 2017E-2022E
Projections usedKindred management projections (Kindred projections) plus NOL projections
Implied value per share$0.31–$7.02
Unlevered FCF for the three months ending 12/31/2017 and fiscal years 2018-2022; added PV of NOL carryforwards discounted at 8.50%-9.50%; subtracted net debt (adjusted for insurance restructuring cash and SNF divestiture) and book value of preferred stock. $9.00 consideration was above the range.
Selected public companies (8)
Chemed Corporation · LHC Group, Inc. · Amedisys, Inc. · Addus HomeCare Corporation · Encompass Health Corporation (formerly HealthSouth Corporation) · Select Medical Holdings Corporation · The Ensign Group, Inc. · Genesis Healthcare, Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / 2018E EBITDA, as adjusted (homecare comparables) | 9.7x | — | 15.9x | — | — |
| EV / 2018E EBITDA, as adjusted (facility-based care comparables) | 4.3x | — | 10.1x | — | — |
| EV / 2018E EBITDA (blended, applied to $515mm 2018E EBITDA) | — | — | — | 7.3x–9.5x | $6.96–$19.42 |
Selected precedent transactions (13)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2015-06-11 | Reliant Hospital Partners, LLC | HealthSouth Corporation | 9.8x EV / LTM EBITDA |
| 2014-11-12 | Centerre Healthcare Corporation | Kindred Healthcare, Inc. | 11.2x EV / LTM EBITDA |
| 2015-06-15 | Revera Inc. | Genesis Healthcare, Inc. | 7.9x EV / LTM EBITDA |
| 2011-02-08 | RehabCare Group, Inc. | Kindred Healthcare, Inc. | 7.7x EV / LTM EBITDA |
| 2013-04-25 | Certain facilities owned by Kindred Healthcare, Inc. | Vibra Healthcare, LLC | 6.4x EV / LTM EBITDA |
| 2010-08-24 | Certain facilities owned by Vista Healthcare Holdings, LLC | Kindred Healthcare, Inc. | 6.7x EV / LTM EBITDA |
| 2010-06-21 | Regency Hospital Company, L.L.C. | Select Medical Holdings Corporation | 7.6x EV / LTM EBITDA |
| 2009-11-03 | Triumph HealthCare Holdings, Inc. | RehabCare Group, Inc. | 6.2x EV / LTM EBITDA |
| 2014-12-23 | Curo Health Services, LLC | Thomas H. Lee Partners, L.P. | 8.6x EV / LTM EBITDA |
| 2014-11-24 | EHHI Holdings, Inc. | HealthSouth Corporation | 9.7x EV / LTM EBITDA |
| 2014-10-09 | Gentiva Health Services, Inc. | Kindred Healthcare, Inc. | 9.9x EV / LTM EBITDA |
| 2013-09-19 | Harden Healthcare Holdings, Inc. | Gentiva Health Services, Inc. | 11.1x EV / LTM EBITDA |
| 2010-05-24 | Odyssey HealthCare, Inc. | Gentiva Health Services, Inc. | 10.7x EV / LTM EBITDA |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / LTM EBITDA (as of 9/30/2017, excluding home health care and LTAC payment adjustments) | 6.2x | — | 11.2x | 8.5x–10.0x | $7.64–$15.20 |
| EV / LTM EBITDA (as of 9/30/2017, including home health care and LTAC payment adjustments) | 6.2x | — | 11.2x | 8.5x–10.0x | $-0.54–$5.57 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Illustrative Potential Separation Costs | Estimated illustrative costs of a hypothetical separation of Kindred into two or more businesses (debt make-whole, new financing fees, taxes on gains in excess of NOLs, $40mm of annual pre-tax dis-synergies valued at 7.25x-9.50x, other one-time costs), estimated at $5.00-$6.64 per share of cost. | $5.00–$6.64 |
| Historical Share Price Analysis | Closing price of Kindred common stock from 12/16/2016 to the unaffected date (12/15/2017) ranged from $5.60 to $11.70. | $5.60–$11.70 |
| Research Price Targets Analysis | Equity research forward price targets as of the unaffected date of $7.00-$11.00; discounted at 10.0% cost of equity to present value of $6.36-$10.00 per share. | $6.36–$10.00 |
| Illustrative Future Share Price Analysis | Applied Adjusted EV/EBITDAR multiples of 7.0x-8.0x to projected 2019, 2020 and 2021 EBITDAR, adjusted for net debt, NCI and remaining PV of NOLs (9.0% discount rate), then discounted implied future share prices at 10.0% cost of equity. Results: 8.0x EBITDAR - $12.99 (1-yr), $13.69 (2-yr), $12.18 (3-yr); 7.0x EBITDAR - $5.05, $6.14, $5.43. | $5.05–$13.69 |
| Illustrative Discounted Cash Flow Sensitivity Analysis (tax reform) | Using the Kindred tax sensitivity projections (21% federal tax rate, interest deduction caps) and discount rates of 9.0%-9.5%: $7.67-$12.67 per share with no Medicare reimbursement reduction and $4.77-$9.31 per share assuming a 1% Medicare reimbursement reduction beginning 2021. | $4.77–$12.67 |
| Illustrative Future Share Price Sensitivity Analysis | Using the Kindred tax sensitivity projections, 10.5% cost of equity discount rate and 9.25% for NOLs: $4.88-$11.54 per share with no Medicare reduction and $2.94-$9.32 per share with a 1% Medicare reimbursement reduction. | $2.94–$11.54 |
Transaction fee of $17.5 million, $2.5 million paid following delivery of the Barclays opinion (not contingent on the conclusion of the opinion or consummation), remainder contingent upon consummation of the merger. Engagement letter dated December 16, 2016. Barclays received ~$100,000 from Kindred, ~$200,000 from Humana, ~$24.4 million from TPG and ~$9.6 million from WCAS in investment banking fees over the prior two years.
Opinion of Guggenheim Securities to the target board
Delivered December 19, 2017 · Fee $17.5M ($17.5M contingent on closing), $2.5M on delivery of the opinion
Discounted cash flow assumptions
Discount rate8.0%–9.3%
Basisestimate of Kindred's weighted average cost of capital
Terminal valuePerpetuity growth
Perpetuity growth1.8%–2.3%
Exit multiple—
Projection period2017E-2022E
Projections usedKindred projections (management)
Implied value per share$1.40–$10.34
Stand-alone intrinsic value basis. Separate informational DCFs using Tax Rate Adjustment ($7.73-$18.21) and Tax Rate plus 1% Medicare Adjustment ($5.24-$14.78) used a discount rate range of 8.25%-9.50%.
Selected public companies (9)
The Ensign Group, Inc. · Genesis Healthcare Inc. · HealthSouth Corp · Select Medical Holdings Corporation · Amedisys, Inc. · Chemed Corporation · LHC Group, Inc. · Almost Family, Inc. · Addus HomeCare, Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| Adjusted EV / NTM EBITDAR (specialty hospital: Ensign 8.0x, Genesis 7.0x) | 7.0x | — | 8.0x | 7.5x | — |
| EV / NTM EBITDA (selected companies: Genesis 4.4x to Chemed 16.1x) | 4.4x | — | 16.1x | 8.6x | — |
| Overall reference range - Kindred management estimates (7.5x AEV/NTM EBITDAR to 8.6x EV/NTM EBITDA) | — | — | — | 7.5x–8.6x | $4.68–$11.73 |
| Overall reference range - Wall Street consensus estimates (7.5x AEV/NTM EBITDAR to 8.6x EV/NTM EBITDA) | — | — | — | 7.5x–8.6x | $5.96–$12.65 |
Selected precedent transactions (13)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2014-11-12 | Centerre Healthcare Corporation | Kindred Healthcare, Inc. | 11.2x EV / LTM EBITDA |
| 2009-11-03 | Triumph HealthCare Holdings, Inc. | RehabCare Group Inc. | 6.2x EV / LTM EBITDA |
| 2015-06-15 | Revera Incorporated | Genesis Healthcare, Inc. | 7.9x EV / LTM EBITDA |
| 2015-06-11 | Reliant Hospital Partners, LLC | HealthSouth Corp | 9.8x EV / LTM EBITDA |
| 2013-04-25 | Kindred Healthcare, Inc. | Vibra Healthcare, LLC | 6.4x EV / LTM EBITDA |
| 2011-02-08 | RehabCare Group Inc. | Kindred Healthcare, Inc. | 7.7x EV / LTM EBITDA |
| 2010-08-24 | Vista Healthcare, LLC | Kindred Healthcare, Inc. | 6.7x EV / LTM EBITDA |
| 2010-06-21 | Regency Hospital Company, LLC | Select Medical Holdings Corporation | 7.6x EV / LTM EBITDA |
| 2014-10-09 | Gentiva Health Services, Inc. | Kindred Healthcare, Inc. | 9.9x EV / LTM EBITDA |
| 2014-12-23 | Curo Health Services, LLC | Thomas H. Lee Partners LP | 8.6x EV / LTM EBITDA |
| 2014-11-24 | EHHI Holdings, Inc. | HealthSouth Corp | 9.7x EV / LTM EBITDA |
| 2013-09-19 | Harden Healthcare Holdings, Inc. | Gentiva Health Services, Inc. | 11.1x EV / LTM EBITDA |
| 2010-05-24 | Odyssey HealthCare, Inc. | Gentiva Health Services, Inc. | 10.7x EV / LTM EBITDA |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / LTM EBITDA (change-of-control) | 6.2x | — | 11.2x | 8.1x–9.9x | $5.62–$14.25 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Recap of Implied Merger Financial Metrics | At $9.00 per share: 4.7% premium to $8.60 closing price on 12/15/17, 27.7% premium to 90-day VWAP of $7.05, (23.1)% discount to past year's high of $11.70; AEV/LTM EBITDAR of 8.2x actual / 8.5x Phase II adjusted; AEV/NTM EBITDAR 8.0x (management) / 7.8x (consensus); EV/LTM EBITDA 8.2x actual / 8.8x adjusted; EV/NTM EBITDA 8.0x (management) / 7.9x (consensus). | — |
| Illustrative Discounted Cash Flow Analyses (Tax Bill Cases) | For informational reference: discount rate 8.25%-9.50%, perpetuity growth 1.75%-2.25%. Tax Rate Adjustment case: $7.73-$18.21 per share. Tax Rate and Medicare Adjustment case (1% Medicare revenue reduction): $5.24-$14.78 per share. | $5.24–$18.21 |
| Stock Price Trading History (52-week) | Kindred common stock generally traded in a range of approximately $5.50-$11.70 per share during the 52 weeks ended December 15, 2017. | $5.50–$11.70 |
| Wall Street Equity Research Analyst Stock Price Targets | Forward price targets of $7.00-$11.00 per share as of 12/15/2017; discounted at a 10% cost of equity to present values of $6.82-$10.00 per share. | $6.82–$10.00 |
Cash transaction fee of $17.5 million payable upon consummation of the merger; a $2.5 million cash milestone fee was paid following delivery of the opinion and will be credited against the transaction fee. Received ~$10 million from Kindred and ~$10 million from TPG for unrelated services in the prior two years.
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Management projections
| Projection year | Year 1 | Year 2 | Year 3 | Year 4 | CAGR |
|---|---|---|---|---|---|
| Revenue | $6.2B | $6.4B | $6.6B | $6.8B | 3.5% |
| Revenue growth | 2.8% | 3.8% | 3.1% | 3.5% | |
| EBITDA | $520M | $531M | $519M | $555M | 2.2% |
| EBITDA growth | 1.0% | 2.1% | -2.3% | 6.9% | |
| EBITDA margin | 8% | 8% | 8% | 8% | |
| Implied EV / EBITDA | 7.9x | 7.7x | 7.9x | 7.4x |
Year-1 growth is against LTM at announcement ($6.0B revenue, $515M EBITDA); later years are year over year.
Kindred management prepared the "Projections" provided to the Board, Barclays and Guggenheim Securities, covering 2018E-2022E (with underlying projections running 2017-2022). Revenue grows from $6,000 million in 2018E to $6,830 million in 2022E; EBITDAR from $810 million to $881 million; EBITDA from $515 million in 2018E to $555 million in 2022E. Management also prepared NOL projections for 2017-2022 and illustrative sensitivity cases adjusting for the Tax Cuts and Jobs Act (21% federal rate, 30% interest deduction cap) and a hypothetical 1% reduction in Medicare reimbursement rates beginning in 2021.
Process notes
Two fairness opinions delivered to the Kindred Board: Barclays (oral 12/18/2017, written 12/18/2017) and Guggenheim Securities (oral 12/18/2017, written opinion dated 12/19/2017). Transaction is structured as a merger of Kindred with a TPG/WCAS/Humana consortium vehicle followed by a separation of the Homecare Business (HomecareCo - TPG/WCAS/Humana) from the Hospital Business (HospitalCo - TPG/WCAS); PSPIB (Port-aux-Choix Private Investments Inc.) was also a guarantor/equity provider. A Transaction Committee of the Board oversaw the process. Barclays' DCF range ($0.31-$7.02) was below the $9.00 consideration and its precedent transaction range including CMS payment adjustments was ($0.54)-$5.57, reflecting the leveraged capital structure and reimbursement headwinds. Barclays' analyses expressly excluded the impact of the Tax Cuts and Jobs Act (signed 12/22/2017), with sensitivity cases provided for illustrative purposes only. Termination fee of $29 million payable to TPG VII Management, Port-aux-Choix, WCAS Management and Humana, plus up to $10 million expense reimbursement; $7.5 million expense reimbursement on a "naked no vote"; reverse termination fee of $61.5 million plus $5 million expense reimbursement payment and up to $13.5 million of separation-related expenses.
Other Hospitals fairness opinions
- LifePoint Health / Apollo Global Management 2018 · 7.5x EV/EBITDA
- Health Management Associates / Community Health Systems 2013 · 9.1x EV/EBITDA
- Vanguard Health Systems / Tenet Healthcare 2013 · 8.1x EV/EBITDA
- Select Medical / WCAS, et. al. 2026 · 8.0x EV/EBITDA
All Hospitals opinions → · Barclays opinions · Guggenheim Securities opinions