June 1st Update

[pl_alertbox type=”info”] This Home Health Index (HH Index) measures the performance of four publicly traded home health companies, all listed on the NASDAQ — Almost Family (AFAM), LHC Group (LHCG), Gentiva (GTIV) and Amedisys (AMED). This index is updated monthly. [/pl_alertbox]

Quote of the Month:

“Despite Gentiva’s actions, we will not be deterred. We are determined to pursue the proposed combination of Kindred and Gentiva and are committed over the long-term to achieving our objective.”  Paul Diaz, CEO, Kindred Healthcare

This in response to Gentiva’s adoption of a poison pill designed to stop Kindred’s hostile takeover.

The Stoneridge Partners Home Health Index (HH Index) increases by 9%.

The increases in the stock market as a whole continue with the S&P 500 now up four straight months, and, this month, our Stoneridge Partners Home Health Index (HH index) showed a nice increase, plus 9%….but that is terribly misleading.

Due to Kindred’s $14 offer, Gentiva’s stock increased by 80%.  If Gentiva were to be dropped from our index, we would have suffered our fifth straight monthly loss…..and even with this large increase in Gentiva’s stock our index is still down 17% YTD.   More on the Gentiva-Kindred battle (war) later in this column.

The high for our HH Index was set in September, 2008 at 41.75.  We now sit at 17.27, down 58%.

Here are this month’s results:

Company 5/31/14 4/30/14 Mos % Change YTD % Change Year Ago % Change
Almost Family 20.54 21.47 -4.33% -36.47% +3.89%
Amedisys 14.55 13.63 +6.75% -0.55% +18.10%
Gentiva 13.63 7.53 +81.01% +9.83% +27.86%
LHC Group 20.37 20.78   -1.97% -15.27% -7.37%
HH Index 17.27 15.85 +8.96% -17.17% +6.72%
S&P 500 19.23.57 1883.95   +2.10%  +4.07% +17.96%
Addus 22.76 21.62 +5.27%  +1.38% +26.51%

So there you have it…quite a mixed bag, with Almost Family starting out the year at 32, and now down five straight months to 20.5….a 36.5% drop, and Gentiva, after an 80% jump in May is still up only 9.8% YTD.

Amedisys is flat for the year, while LHC Group is down 15%. Addus, after a great run, is up just a little over 1%.

As I said, a real mixed bag.

IN THE NEWS:

Gentiva-Kindred:  On May 15 we woke up to the following headline:

Kindred Healthcare Announces Proposal to Acquire Gentiva Health Services for $14.00 Per Share in Cash and Stock, Representing a 64% Premium, in $1.6 Billion Transaction

With that announcement the price of Gentiva’s stock leaped from 8 to 14.

It certainly came as a surprise that Kindred was making an offer, but what came as a real surprise was seeing a 64% premium.  It is estimated that the total value of the transaction, including assumption of debt is approximately $1.6 billion.  Gentiva’s revenue run rate is about $1.9 billion, so that works out to about 82% of revenue.

Prior to the press release, communication had taken place between the two companies, and, at that time, Kindred made their offer.  Gentiva declined.  On May 15 Kindred went public with their offer, in what has been termed as a hostile take-over attempt.  Again, Gentiva publicly declined.

To read the press release, the initial letter from Kindred and Gentiva’s response go to the following link:  Gentiva-Kindred May 15

On May 23rd Gentiva adopted a poison pill, which is designed to stop a hostile takeover by triggering the issue of new shares that dilute the holdings of investors who exceed a threshold.  To read the Gentiva press release: Gentiva Board Action Poison Pill

Clearly Gentiva’s board feels strongly that Kindred’s offer is not in the best interests of their shareholders.  They consider Kindred’s attempt as someone looking to “opportunistically appropriate their value”.

(Note: It seems that the term “opportunistic” can have a positive or negative connotation depending on which side of the table you are sitting on).

In response to the “poison pill”, Paul Diaz, CEO of Kindred Healthcare issued the following statement:

“Despite Gentiva’s actions, we will not be deterred.  We are determined to pursue the proposed combination of Kindred and Gentiva and are committed over the long-term to achieving our objective”.

Gentiva’s gross margin is considerably higher than Kindred’s (42% vs. 33.5%), and Kindred believes that, after eliminating overlapping costs, acquiring Gentiva would immediately be accretive, and in fact it refers to the earnings impact as being “significant”.

It seems that Kindred has now become the ineradicable whale ($5.2 B) just waiting, following, and taking a long-term approach to its goal of swallowing Gentiva whole.

Will Kindred be successful?  The market seems to think there is a strong possiblity.  Remember that overnight Gentiva stock went from 8 to 14.  One would think that if the transaction were dead the stock would retreat back to 8 or lower, but it hasn’t.  Gentiva’s stock now sits at $13.63.  It seems that the market is betting this transaction will go through.

Other Interesting Developments:  On May 2nd North Tide Capital increased their stake in Almost Family to over 10%, and then on May 9 they announced that they have increased their stake in Amedisys to over 10%.  North Tide Capital was founded by Conan Laughlin, and is a healthcare focused investment fund with $1.1 billion in assets.

It should be noted that North Tide has a record of being an activist investor, as they are now fighting for significant changes at publicly traded Healthways (HWAY).

It should also be noted that several months ago KKR Asset Management announced that they now hold a 14.9% stake in Amedisys.  Coincidentally, soon after their announcement William Borne, Amedisys’ founder resigned all positions, and KKR’s Nathaniel Zilkha was nominated to the board.

Clearly some large investment firms see opportunity in the home care space, which on the surface may appear to be positive for our industry.

But what do all of these developments really portend?  Whether good or bad, change is in the works.

 GRAPHS: 

This first graph shows the HH Index compared to the actual prices of the individual companies that make up the chart through May, 2014.

(Note that by hovering your pointer over a spot, you will get the price at that point.  For the past decade, it’s been quite a ride) [iframe_loader src=”http://stoneridgepartners.com/hhi/hhi.html” width=”604″ height=”450″ scrolling=”no”]

Stoneridge Partners Home Health Index vs. S&P 500 Index

This second chart compares the percentage change of the HH index to the percentage change in the S&P 500 index for over 13 years,  going back to November, 2002.  It has been quite a ride. [iframe_loader src=”http://stoneridgepartners.com/hhi/hhi-vs-sp.html” height=”450″ scrolling=”no”]

Stoneridge Partners Home Health Index 12 Months Trailing

This third graph is a 12 month trailing chart of the HH Index compared to the actual prices of the individual companies that make up the chart, through May, 2014. [iframe_loader src=”http://stoneridgepartners.com/hhi/hhi-12.html” height=”450″ scrolling=”no”]

[iframe_loader src=”http://stoneridgepartners.com/hhi/hhi-addus.html” width=”604″ height=”450″ scrolling=”no”]

PERCENT OF REVENUE & MULTIPLE OF EBITDA: 

For many years the selling price of good Medicare agencies was generalized at about 100% of revenue.  Clearly that is no longer the case.    Enterprise Value = EV
Company EV as % of Revenue
Almost Family 60%
Amedisys 43%
Gentiva 89%
LHC Group 67%
Addus 84%

MULTIPLES OF EBITDA 

Company Multiple of EV/EBITDA
Almost Family 15.84
Amedisys 16.65
Gentiva 12.48
LHC Group 8.29
Addus 13.07

The above calculations are based on Enterprise Value (EV), with data provided by Capital IQ.  EV has been calculated based on stock prices June 1.

Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents.  EBITDA is calculated using methodology that may differ from that used by a company it is reporting.

MERGER & ACQUISITION ACTIVITY:

A New Health Network:  Ascentia Health and CHE Trinity have formed a joint company for managed-care contracting in Michigan, uniting a network of 27 hospitals, more than 12 physician organizations and 5,000 physicians in the state.  The new company—Together Health Network—will become one of the largest and most closely aligned clinically integrated networks in the nation.

Camellia Home Health & Hospice, based in Hattiesburg, Miss has acquired Lawley Premier Hospice Care of Rainbow City.

Five Points Healthcare, based in Atlanta, GA has purchased BestCare HomeCare based in Wodbridge, VA with an office in Winchester, VA.  BestCare is a combination of Medicare, Medicaid waiver, and personal care.

Signature Hospice, Home Health and Home Care recently acquired XL Hospice, a company that provides services throughout Idaho and Nevada.

STONERIDGE PARTNERS TRANSACTIONS:

This past month we completed two transactions:

Lutheran Home Care & Hospice based in Chambersburg, PA purchased Sacred Heart Home Health & Hospice based in Allentown, PA.  Rhonda Gronberg, our Director of Development, provided advisory services.

Senior Solutions Home Health Care has executed a purchase agreement for a sale to a health care management company, closing pending regulatory approval.  Cory Mertz, a partner at Stoneridge Partners, is providing sell-side advisory services.

COMPANIES EXCLUSIVELY LISTED FOR SALE BY STONERIDGE:

  • Florida East Coast – $4 million plus private care with geriatric care component.  Steady 37% gross profit consistently produces high owner’s income.  Top management in place ready for transition.  Stoneridge file S-3004.
  • Ohio – $2.5 million Medicare agency in Columbus area, 75% traditional Medicare, long history of quality care.  Stoneridge file S-5232.
  • Mountain west – $18 million multi location home care and hospice with over $2.7 million EBITDA.  Strong management team in place.  Stoneridge file #S-5245.
  • Georgia – Medicaid provider with over $6 million in revenue, 40% gross margin, and approx. $800K in EBITDA.  Stoneridge file S-5263.
  • Texas – Multi-location private duty home care agency, $3.4 million revenue with a consistent 40% gross profit produces 15% EBITDA.   A quality agency evidenced by their latest survey with zero deficiencies,  Stoneridge file #S-4250.
  • Florida – $4 million revenue Medicare home care agency serving five counties in central Florida.  Multiple locations with strong management team in place.  Stoneridge file S-5272. 
  • West Virginia – Medicare home care agency in CON state.  $3 million in revenue, growing with new CON territories being developed.  Strong management team.  Stoneridge file S-5261.
  • Texas – $3.5 million Medicare & Medicaid provider.  40% pediatric servies, Gross margin of 48% and adjusted EBITDA of $400,000.  Stoneridge file #S-5231.
  • Minnesota – Medicaid home care agency.  Large and diversified with $11 million in revenue, with unique license that positions it well for growth.  Stoneridge fileS-5268.
  • Florida – Diversified Medicare/Medicaid Home Care Agency with revenue of approx. $4 million.  Professionally operated with excellent financial records.  Stoneridge file S-5280.
  • Dallas-Ft. Worth – $1.7 million of pure high-end private pay.  No Medicare/Medicaid. Professionally run and profitable.  Stoneridge file S-5281.
  • Missouri – $10 million revenue, primarily Medicaid but has Medicare provider number.  Stoneridge file# 5257.
  • East Texas – $1.3 million Medicare agency, profitable and growing.  Stoneridge file #S-5264.

To see more home care agencies and hospices exclusively list for sale by Stoneridge Partners go to the following link:

Agencies for Sale

Do you know of any acquisitions that have taken place?  We would be interested in your comments.  At the top of this column is a “Contact Tab” with a section for comments.  These can be sent anonymously.  The return email address can be left blank.  We are interested in what you have to say, or acquisitions that you know about.

From the New Yorker

PremiumHeaven

MORE:  And for additional musings on the state of homecare and what’s going on at Stoneridge Partners, visit our blog, which is updated regularly: stoneridgepartners.com/blog 

From Don Cummins, Publisher of “The Home Health Index”  don@stoneridgepartners.com – Hey Lou – Here’s my number 800-218-3944

Previous editions of this monthly newsletter can be searched for below.

 

 

 

 

Links to Google Finance: Almost Family | Amedisys | Gentiva | LHC Group