Brigade Opposes Announced Acquisition of Kindred Healthcare by TPG Capital, Welsh, Carson, Anderson & Stowe and Humana
December 27 2017 - 1:04PM
Business Wire
Brigade Capital Management, LP (“Brigade”) today announced that
it is opposed to the announced acquisition of Kindred Healthcare by
affiliates of TPG Capital, Welsh, Carson, Anderson & Stowe and
Humana, and will vote against a transaction under the current
terms. Brigade believes that from the perspective of maximizing
shareholder value, the proposed acquisition severely undervalues
the company and ensures that the buyers – rather than existing
shareholders – will reap the benefits of value enhancement the
business is expected to generate from a number of initiatives and
other factors. These include an improved regulatory environment,
Kindred’s divestiture of its low-multiple Skilled Nursing assets,
the company’s actions to strengthen its balance sheet since the
third quarter of 2017, transitory disruptions to Kindred’s business
in 2017 as a result of natural disasters, projected improvement in
the company’s cash flow in 2018, the substantial completion of a
repositioning of the portfolio and infrastructure in the company’s
Hospital Division, and the significant value of the company’s net
operating loss carry forward.
Brigade’s reasons for opposing the announced acquisition are
explained in greater detail in the letter below.
December 27, 2017
Benjamin A. BreierPresident and Chief Executive OfficerKindred
Healthcare, Inc.680 South Fourth StreetLouisville, Kentucky
40202
CC: The Board of Directors Re: Announced Acquisition
of Kindred Healthcare by TPG Capital, Welsh, Carson, Anderson &
Stowe and Humana Inc. for $9.00 Per Share in Cash
Dear Mr. Breier:
As large and long-term shareholders of Kindred Healthcare, Inc.
(“Kindred” or the “Company”), we were shocked at Kindred’s
announcement on December 19, 2017 that it had entered into a merger
agreement, pursuant to which the Company will be acquired by
affiliates of TPG Capital, Welsh, Carson, Anderson & Stowe, and
Humana Inc. for the disappointing and grossly inadequate price of
$9.00 per share.
From the perspective of maximizing shareholder value, this is a
terrible time to sell the Company. This acquisition appears timed
to enable the buyers and members of management to (i) take
advantage of the negative impact that certain recent (but
temporary) events have had on the Company’s stock price, and at the
same time (ii) avoid paying full value for operational enhancements
that are in process but not likely to be fully realized until next
year. Over the past year, Kindred’s earnings power has been
negatively impacted by significant restructuring, disposition and
transition activities which, per recent management commentary, will
be largely complete in late 2017. One needs to look no further than
management’s discussion during Kindred’s third quarter 2017
earnings call for proof of this point. Time and again during the
call, management spoke of how the Company’s underlying businesses
faced various challenges in 2017, but have been restructured in a
manner that should drive improved performance going forward. These
statements are consistent with the FY18 financial guidance that
management provided on that call as well. These near-term set-backs
should position Kindred for stronger operating performance and
substantial stock price appreciation going forward.
Given these circumstances, we would have expected the Company’s
fiduciaries to stay the course in order to enable shareholders to
reap the benefits of these improvements that they patiently awaited
from their continued ownership in Kindred. Instead, management and
the Board of Directors have chosen to pursue a transaction that
severely undervalues the Company and ensures that the buyers –
rather than existing shareholders – will reap the benefits of the
value enhancement the improved business will generate. For these
reasons, Brigade Capital does not believe the proposed transaction
is in the best interests of Kindred shareholders, and intends to
vote against the transaction.
In Brigade’s view, these short-term issues render highly
misleading the purported 27% premium over the Company’s 90-day
volume weighted average price for the period ending December 15,
2017 that shareholders are supposed to receive under the proposed
transaction. The transitory issues outlined above have created
significant financial modeling complexity and have distorted the
Company’s true earnings potential. All of which has negatively
impacted Kindred’s stock price, undermining any significance of the
premium to the unaffected pre-announcement stock price.
In particular, the following initiatives and other factors can
reasonably be expected to increase both long-term growth and
shareholder value:
- Improved Regulatory Environment. In
July 2017, the Company’s stock price fell by almost 15% because the
Centers for Medicare & Medicaid Services (“CMS”) unexpectedly
proposed reimbursement methodology changes that could have
negatively impacted Kindred’s Home Health business segment. Four
months later, however, CMS decided not to include these changes in
the final rule, removing a major near-term potential threat.
- Kindred has divested its low multiple
Skilled Nursing assets. Kindred has been actively divesting its
skilled nursing facilities throughout the course of 2017. An
unfavorable regulatory backdrop, high capital-intensity
requirements and earnings volatility in the Skilled Nursing
business have depressed this segment’s attractiveness and we
believe pressured Kindred’s recent trading multiple. The bulk of
these facilities were sold in the second half of 2017 and now that
they have transitioned to new owners, Kindred is in position to
remove a significant amount of overhead expense and benefit from
the more favorable earnings trajectory and cash flow
characteristics of the remaining businesses. The Company also
executed contracts to provide rehab services for a number of the
transferred skilled nursing facilities, but the economic benefit of
these and any additional new contracts is not fully reflected in
Kindred’s financials for the last twelve months.
- The Company has strengthened its
balance sheet since 3Q17. In October 2017, Kindred restructured its
insurance program in a manner that released $281 million of cash
that was trapped in its captive insurance subsidiary, which the
Company then used to pay down its revolver while still adding ~$100
million in cash to its balance sheet. These changes alone should be
worth around $3.00 per share of value to the Company’s stock price.
Tellingly, the Company’s stock jumped from $6.00 per share to $8.40
per share on the day the Company announced this restructuring, and
the stock price remained in a range between $7.15 and $8.60 per
share per share leading up to the announcement of the merger.
Furthermore, and again consistent with management commentary,
settling the working capital accounts related to the divested
skilled nursing assets has had a temporary negative impact on cash
flow generation on a trailing twelve month basis.
- Natural disaster activity in 2017
distorts Kindred’s trailing twelve month performance. Kindred’s
Home Health and Hospital segments were impacted significantly by
hurricanes in the third quarter of 2017. Management commentary
suggests these disruptions were transitory and expects both
segments to return to year-over-year growth in the fourth quarter
and beyond.
- Kindred is at an earnings and cash flow
generation inflection point. Management expects the fourth quarter
of 2017 to be its strongest cash quarter of the year, and in 2018,
it is projecting $515 million of core EBITDA and $175 million of
core free cash flow.
- Kindred’s Hospital Division is poised
for improved performance. This segment’s trailing twelve month
performance has been negatively impacted by a reimbursement change
that took effect in 2016. Kindred’s hospital division is expected
to return to favorable year-over-year growth comparisons starting
in the fourth quarter of this year. This reimbursement change has
limited the Company’s growth and required significant portfolio and
infrastructure restructuring. The majority of this repositioning
activity has been completed, which should drive positive earnings
momentum going forward.
- Significant go forward cash tax shield.
The Company anticipates a net operating loss balance of $550 to
$600 million at the end of 2017. This should provide Kindred
shareholders with significant value by limiting the Company’s cash
income tax for several years.
In light of the foregoing, the $9.00 per share valuation
underlying the proposed transaction is fundamentally inconsistent
with management’s own statements regarding the Company’s positive
outlook, performance initiatives and earnings power going forward.
In our view, the deal price is not reflective of Kindred’s
intrinsic value and will short-change existing shareholders.
Kindred is positioned for significant stock price appreciation. The
Company has ample liquidity, no near-term debt maturities, and is
expected to generate around $175 million of core free cash flow in
2018. There is no urgency to sell the Company, and conducting a
sale process utilizing Kindred’s significantly distorted trailing
twelve month performance seems particularly misguided.
We believe this position is widely held by investors and would
note the significant amount of trading activity in Kindred stock
since the transaction was officially announced above the proposed
$9 share offer price.
The proposed merger does not come close to maximizing
shareholder value, is not in the best interests of shareholders and
should not be approved by Kindred’s owners. Brigade is disappointed
that Kindred’s management and board have chosen to move forward
with such a poor transaction.
We look forward to reviewing additional details supporting this
transaction in the definitive proxy materials, including the
economic incentives and ongoing participation being offered current
management and Directors by the proposed future owners.
Kind regards,
__________________________
Donald E. Morgan, III
About Brigade Capital Management, LP
Brigade Capital Management, LP is an SEC-registered investment
advisor focusing on investing in the global high-yield market. The
firm was founded by Donald E. Morgan, III and Patrick W. Kelly in
2006 and is headquartered in New York City with offices in the
United Kingdom, Japan and Australia. The firm employs a
multi-strategy, multi-asset class investment approach focused on
leveraged balance sheets. The core strategies include long/short
credit, distressed debt, capital structure arbitrage and leveraged
equities. Brigade Capital Management, LP’s investment process is
fundamentally driven, focusing on asset coverage and free cash
flow, with an emphasis on capital preservation. The team possesses
deep sector expertise throughout the entire leveraged finance
market and has extensive experience in capital restructurings and
bankruptcy reorganization.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20171227005409/en/
Media:Sard Verbinnen & Co.Paul Scarpetta, 212-687-8080