A major Kindred Healthcare (NYSE: KND) shareholder on Tuesday continued to forcefully protest the company’s planned sale to Humana and private equity firms, arguing in a publicly released letter that the deal would hurt shareholders but line the pockets of Kindred’s directors and top executives.
New York-based Brigade Capital Management has a 5.8% stake in Kindred, and the firm first came out against the planned $4.1 billion transaction shortly after it was announced in December. The deal would divide Kindred into two parts, with the company’s massive home health and hospice arm to be jointly owned by insurance giant Humana (NYSE: HUM) and private equity firms TPG Capital and Welsh, Carson, Anderson & Stowe (WCAS).
In a Dec. 27 letter, Brigade argued that the acquisition price of $9 per share is inadequate. Since that time, the firm has escalated its opposition, recently filing a lawsuit to block the transaction.
Brigade’s latest letter is addressed to Kindred CEO and President Benjamin Breier and runs longer than 2,000 words. It was released Tuesday, in light of a report from Institutional Shareholder Services (ISS)—a large proxy advisory firm—that recommended shareholders vote in favor of the deal.
In making that recommendation, ISS “appears to place undue weight on management’s and the Board’s self-interested view that remaining independent outweighs the risks of rewarding Kindred’s existing shareholders by navigating the regulatory environment and managing the company’s capital structure,” Brigade’s letter states.
That is, Kindred’s management has been making the case to investors that if they were patient, they would see the company’s struggling share price make a turnaround. That argument was based on several factors, including that Kindred had not yet seen the full financial upside from shedding its skilled nursing facility division.
Now, though, Kindred’s management and board are singing a different tune, painting an unrealistically bleak picture of the business environment facing the company in order to rally support for the transaction, Brigade is arguing. For instance, the full benefits of the federal tax reform package have not been properly weighed, while the regulatory environment also has brightened in recent weeks and months, the firm says.
Of particular significance, fears were swirling throughout 2017 regarding a new home health Medicare payment model, known as the Home Health Groupings Model (HHGM), and these concerns and uncertainties had been suppressing Kindred’s share price. HHGM ultimately did not move forward.
“Most critically, the board and management did not go back to the bargaining table following [the Centers for Medicare & Medicaid Services’] decision to not finalize the HHGM proposal, removing a significant overhang,” the letter states. “We view this as an abrogation of the board’s basic duty to secure maximum value for Kindred’s existing shareholders.”
The Brigade letter does not mention that a new payment model, similar in some regards to HHGM, has been put in place under the Bipartisan Budget Act of 2018, passed in February. Asked about this by Home Health Care News, Brigade declined to comment on its letter.
Since first announcing the planned transaction, Kindred has released additional proxy materials to further explain its pessimistic assumptions about the company’s prospects as an independent entity. These further disclosures have not satisfied Brigade. The lack of analysis to support the newly bleak outlook, as well as the lack of information about go-forward benefits for Kindred’s leadership, have reinforced Brigade’s suspicion that the company’s management is acting out of self-interest.
“Shareholders also deserve to know how, if at all, members of senior management with a role in the successor companies are rolling their stock and getting paid going forward, if these executives are at the same time telling Kindred’s owners to be happy with $9 per share,” the letter states.
Absent this information, Brigade is digging its heels in, urging shareholders to vote against the deal and calling for new board and executive leadership at Kindred who would be focused on creating shareholder value.
Kindred had not publicly replied to the letter as of press time. On March 19, the company issued a press release commenting on the ISS report.
“We are pleased that ISS recognizes the significant cash value that will be delivered to stockholders through the transaction and supports our board’s recommendation that stockholders vote ‘FOR’ the transaction,” Breier stated in the press release. “The transaction will deliver certain cash value to Kindred stockholders at a substantial premium in the face of significant operational, regulatory, reimbursement and capital structure risks, especially considering Kindred’s high leverage and pending debt maturities.”
The shareholder vote is scheduled to take place at a meeting on March 29.
Written by Tim Mullaney