Humana Inc. announced Dec. 19 that it has signed a definitive agreement to acquire a 40 percent minority interest in the Kindred at Home Division (Kindred at Home) of Kindred Healthcare, Inc., the nation’s largest home health provider and second largest hospice operator, for estimated cash consideration of approximately $800 million, including Humana’s share of transaction and related expenses to facilitate a complete separation from the Long Term Acute Care and Rehabilitation businesses (the Specialty Hospital company).
The transaction and related expenses include, among other costs, bond breakage fees, the extinguishment of certain legacy liabilities, the acceleration of certain stock awards, and advisory fees and expenses. The implied enterprise value of Kindred at Home is $3.15 billion before these expenses.
As announced, TPG Capital (TPG) and Welsh, Carson, Anderson & Stowe (WCAS), two private equity funds (the Sponsors), along with Humana are jointly creating a consortium to purchase all of the outstanding and issued securities of Kindred Healthcare, Inc. Simultaneously with the closing of that transaction, TPG and WCAS will separate Kindred at Home from the Specialty Hospital company and form a joint venture with Humana to own Kindred at Home.
Humana will own 40 percent of Kindred at Home, with the remaining 60 percent owned by a new entity owned by TPG and WCAS. Currently, nearly 40,000 caregivers serve approximately 130,000 patients daily in Kindred at Home with annual revenues of approximately $2.5 billion. Humana will have no economic interest in the Specialty Hospital company.
Humana believes that a key component of the next generation of its integrated care delivery model is the ability to provide care to consumers, including Humana members, in their home, meeting them where they want to be, in a preferred lower cost setting. This transaction will help Humana manage the chronic conditions of its members and others it serves and provide an additional avenue for the company to address activities of daily living, medication adherence and other health determinants, reinforcing its commitment to managing health holistically, not episodically.
“The acquisition of a minority interest in Kindred at Home, the largest home health company in the country with significant overlap with Humana membership, brings to us an experienced, well-respected home health provider with robust access to extensive clinical capabilities that will allow us to accelerate our strategy to more deeply integrate with our members’ lifestyles,” said Bruce D. Broussard, Humana’s President and Chief Executive Officer.
“We are excited about the opportunity this acquisition provides to advance our vision for integrated care delivery, as we continue to deliver our Humana At Home capabilities while building a transformative platform for the future. We believe that care in the home is a vital element of improving the health of seniors living with chronic conditions, allowing them to receive services in the comfort of their home, with less time in more costly institutional settings.”
This transaction will provide the company with extensive geographic coverage, with approximately 65 percent overlap with Humana’s individual Medicare Advantage membership. In addition, the robust data sharing between Humana and Kindred at Home will yield improved analytics and predictive modeling, providing a transformative platform for the future to advance capabilities including remote monitoring, telehealth, and digital interactions with members and physicians. This technology, together with a collaborative advanced payment model, will arm clinicians with better information to close gaps in care and improve quality.
“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.”
The agreement with the Sponsors includes a put option under which they have the right to require Humana to purchase their interest in the joint venture starting at the end of year three and ending at the end of year four post close. Consideration upon exercise of the put option per the agreement would be valued at an exit multiple of 10.5 times the preceding twelve months earnings before interest, income taxes, depreciation and amortization, or EBITDA, subject to certain adjustments and other provisions customary for transactions of this nature. In addition, the multiple is subject to adjustment up to 11.5 times EBITDA based on the achievement of certain pre-defined value-based outcomes tied to clinical metrics.
The 11.5 times EBITDA exit multiple is comparable to the valuation for Humana’s 40 percent interest. Finally, Humana has a call option under which it has the right to require the Sponsors to sell their interest in the joint venture to Humana beginning at the end of year four and ending at the end of year five post close for cash consideration using the same valuation methodology applicable to the previously discussed put option consideration.
David Causby, currently Executive Vice President and President of Kindred at Home, will serve as Chief Executive Officer of Kindred at Home. The governance structure of the joint venture will be customary for transactions of this nature, including protective rights for Humana, with Humana having heightened oversight over quality, clinical outcomes and compliance.
“We are pleased with our unique partnership with the Sponsors in Kindred at Home, which is aligned around value-based care with incentives designed to drive improved outcomes for the people we serve,” said Brian A. Kane, Humana’s Senior Vice President and Chief Financial Officer.
“The transaction structure provides geographic and clinical scale at an attractive valuation in a capital efficient manner, minimizing our upfront capital outlay, limiting the distraction of an immediate outright acquisition, eliminating all exposure to non-core assets in the Specialty Hospital company, and providing us with a path to eventual control of the nation’s largest home health company in three to five years via a put and call option structure.
“Our sophisticated Sponsor partners will focus on driving growth in the fee-for-service business while together we concentrate on executing a transformation of the home health model to a value-based care platform in a lower risk setting without distraction from our core operations, benefiting both Humana and Kindred at Home over the long-term.”
These transactions, which are anticipated to close in the summer of 2018, are subject to customary state and federal regulatory approvals, including approval by the stockholders of Kindred and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, as well as other customary closing conditions. Humana expects to fund the transaction through the use of parent company cash and will account for its minority investment under the equity method.
The company does not anticipate a material impact to earnings in 2017 from this pending transaction. Given that Humana’s previous financial commentary for the year ending December 31, 2018 contemplated capital deployment, it is not expected that this acquisition will materially change the outlook that was provided. Humana expects the transaction to be slightly accretive to earnings per diluted common share in 2019 and beyond.
Morgan Stanley & Co. LLC is acting as lead financial advisor to Humana and the Sponsors. JPMorgan Chase is also acting as lead financial advisor to the Sponsors. TripleTree, LLC is acting as strategic and financial advisor to Humana. Evercore provided a fairness opinion to the Board of Directors of Humana. Fried, Frank, Harris, Shriver & Jacobson LLP is acting as legal advisor to Humana.