The merger of LHC Group (Nasdaq: LHCG) and Almost Family (Nasdaq: AFAM) will create the second-largest home health provider in the nation. But the new, larger LHC Group will not only be bigger but “better, faster, stronger,” executives said.
The merger, which was announced on Nov. 16, has an implied transaction value of $2.4 billion, according to LHC Group. The transaction brings the new company, which will be traded on the Nasdaq under “LHCG”, to a combined 781 locations, providing home health, hospice and personal care services, with approximately $1.8 billion in revenue. Kindred at Home’s approximately $2.5 billion revenue keeps it the nation’s largest home health care provider by this metric.
Executives from both LHC Group and Almost Family were extremely bullish on the deal during a call with analysts Thursday, playfully quoting hip-hop superstar Kanye West.
“Both companies have been on pretty amazing trajectories,” said Steve Guenthner, president and principal financial officer at Almost Family. “This is continuing those trajectories. Think about Kanye West—[we’re going to be] bigger, better, faster, stronger.”
Joint venture growth
The executives emphasized the complementary additions that each company brings, particularly their aligned strategies to partner with hospital systems.
LHC Group, which is known for its strategic joint venture partnerships with health systems and hospitals over the last several years, sees its merger with Almost Family as a significant growth opportunity to continue completing more of these JV deals.
In recent examples of this strategy, LHC Group partnered with Texas-based Christus Health, while Almost Family completed a $128 million joint venture with Community Health Systems (NYSE: CYH) last year.
“Our experience has been that when we add larger systems, it accelerates the inbound calls into the pipeline,” LHC Group CEO Keith Myers said.
“AFAM’s recent JC with CYH, while just the company’s fist HH JV, was of a significant size and fits well with LHCG’s long held strategy of pursuing health system JVs,” according to a Baird analysis issued Thursday. “We sense tremendous activity building on the development front.”
There also is apparent upside in the geographic combination of the two companies: Across the 781 locations, only 39 markets and 90 counties overlap, according to Baird’s analysis.
“It’s amazing,” Myers said of the minimal geographic overlap. “It’s almost as if it was done by design. That brings the risk profile way down.”
Namely, creating such a large company through a merger comes with some inherent risks, including integration risks, social issues and leverage.
Executives acknowledged some of these risks, noting they were not seeing the deal “through rose-colored glasses.”
The deal is being done as an all-stock transaction, which could eliminate some of these leverage risks, executives stated, calling the deal a “de-lever for both companies.”
In addition, both companies are already utilizing the same Homecare Homebase platform, which will improve integration efficiencies.
Other risk factors include potential adverse reactions from joint venture (JV) partners, though executives don’t foresee those issues.
While one immediate threat to the home health care industry—the proposed home health groupings model (HHGM)—has been cleared for now, market risks still persist for the sector. Home health is still facing a reimbursement rate cut in 2018 of 0.4%, or $80 million.
With an improved cost of capital, one risk could be that the new company would go out and “do something stupid in the interest of growing faster,” executives said. But they also stated the leadership team is experienced enough to avoid this pitfall.
The deal puts “the two best in class sector operators together,” Baird stated. But the firm is still cautious.
“Big deals never work in our sector and so we’re going to take time to think this out,” he wrote.
Kindred likely would take issue with this assessment, as it has been touting the smooth integration of its acquisition of Gentiva Health Services in 2015. But another top-10 home health provider, Brookdale Senior Living (NYSE: BKD), has been struggling ever since acquiring Emeritus Corp. in 2014. However, those issues have been centered primarily on the company’s senior housing operations, not home health.
Investors appeared to see the LHCG-AFAM deal in a positive light. LHC shares were up 2.10% at the end of trading on Thursday, while Almost Family shares shot up 16.24%.
Written by Amy Baxter