Shareholder Opposition Unlikely to Derail Kindred Deal

Since a major shareholder of Kindred Healthcare (NYSE: KND) announced its opposition to a $4.1 billion takeover deal by Humana (NYSE: HUM), the nation’s largest home health care provider has remained mum.

Brigade Capital, a New York-based private equity firm which owns a 5.8% stake in Kindred, said it would vote against the transaction under its current terms, in a public letter dated Dec. 27, 2017. The deal splits Kindred into two businesses. Humana, along with private equity firms TPG Capital, Welsh, Carson, Anderson & Stowe, would own Kindred’s home health care, hospice and community-based business, Kindred at Home. Kindred’s rehabilitation and hospital business will be owned by the private equity groups.

The deal is worth an estimated $4.1 billion and values Kindred’s common stock at $9 per share, approximately a 27% premium to Kindred’s 90-day volume weighted average price at the time of the announcement.

Brigade Capital took issue with the valuation, stating the deal “is fundamentally inconsistent with management’s own statements regarding the company’s positive outlook, performance initiatives and earnings power going forward.” The company stated it was “shocked” by Kindred’s announcement of the deal on Dec. 19, and called the share price of $9 “disappointing.”

Kindred had not responded to the public letter as of Jan. 3.

While analysts declined to comment on the valuation, opposition from shareholders isn’t unusual in big merger announcements, according to S&P Global Ratings Healthcare Group Director David Kaplan.

“What’s unique here though, is that it’s being led by a large holder of the stock,” he said.

As the fifth-largest shareholder of Kindred, Brigade thinks the deal “ensures that the buyers–rather than existing shareholders–will reap the benefits of the value enhancement the improved business will generate,”  according to the letter, signed by Brigade Co-Founder Donald E. Morgan, III.

Brigade believes Kindred’s long-term growth and shareholder value could increase for several reasons, including: an improved regulatory environment after the Centers for Medicare & Medicaid Services (CMS) opted against including reimbursement methodology changes; Kindred’s divestiture of its skilled nursing facilities throughout 2017; and the company bolstering its balance sheet since the third quarter of 2017.

While the letter contains a blistering opposition, it does not mention any legal action from Brigade Capital to impede the deal. As such, the letter likely won’t have much impact on the deal’s progress, according to Elan Nat, an associate director at S&P.

“I think it’ll be resolved, and however it’s settled, I don’t think a 6% owner of the company would derail it altogether,” he told HHCN.

The lack of a legal threat can be contrasted with the actions of other activist shareholders in another recent large health care transaction: the $7.4 billion merger between Care Capital Properties, Inc. and Sabra Health Care REIT, Inc. (Nasdaq: SBRA), two real estate investment trusts (REITs) with a skilled nursing and senior living focus. Two minority shareholders in Sabra came out swinging against the deal when it was announced in mid-2017. The deal was eventually approved by shareholders after CCP settled multiple lawsuits that were characterized as routine for major mergers.

Sabra did not shy away from swinging back at the activist shareholders at the time. CEO Rick Matros described Eminence Capital and Hudson Bay Capital as “a couple of dissident shareholders that do not have the requisite experience to address the fundamentals of this space” in the company’s second-quarter earnings call.

Humana had not responded to Brigade’s letter as of Jan. 3, but the insurer’s executives have discussed caring for customers at home as a means of reducing costs. With the company’s goal of creating value from the Kindred deal, the opposition from Brigade isn’t likely to faze them.

“It seems like a strategic play that Humana would not pass up based on a couple of disgruntled shareholders,” Nat said.

However, Nat was not surprised by the shareholder’s reaction.

“They’re looking to maximize returns, and they feel like they got lowballed,” he said.

Brigade Capital could not be reached for comment beyond the letter at press time.

Written by Maggie Flynn