Kindred shareholder calls $4B Humana deal ‘grossly inadequate’

One of the major shareholders in home health and hospice operator Kindred Healthcare has come out in opposition to its proposed sale to health insurer Humana and two private equity firms, arguing the proposed deal undervalues Kindred and there should be “no urgency to sell the company.”

The criticism came from Donald Morgan III, founder of Brigade Capital Management, which along with its affiliates controls 5.8 percent of Kindred’s shares. In a letter to Kindred president and CEO Benjamin Breier, Morgan made the case the sale price of $9 per share was “disappointing and grossly inadequate” and unfairly weighted towards the buyers—Humana and equity firms TPG Capital and Welsh, Carson, Anderson & Stowe—as well as Kindred management based on “near-term set-backs,” such as financial impacts from natural disasters in 2017 and proposed reimbursement changes that CMS didn’t finalize.

“Given these circumstances, we would have expected the company’s fiduciaries to stay the course in order to enable shareholders to reap the benefits of these improvements that they patiently awaited from their continued ownership in Kindred,” Morgan wrote. “Instead, management and the board of directors have chosen to pursue a transaction that severely undervalues the company and ensures that the buyers—rather than existing shareholders—will reap the benefits of the value enhancement the improved business will generate.”

Morgan said Kindred’s moves to improve its balance sheet, divest its skilled nursing assets and anticipated gains in performance among its hospital division position the company for “significant stock price appreciation. The current deal, he said, doesn’t reflect the company’s value and would “short-change existing shareholders.”

“The company has ample liquidity, no near-term debt maturities and is expected to generate around $175 million of core free cash flow in 2018,” he wrote. “There is no urgency to sell the company, and conducting a sale process utilizing Kindred’s significantly distorted trailing twelve-month performance seems particularly misguided.”

The proposed acquisition would see Kindred split up into two segments: one containing the hospice and home health business, in which Humana would pay $800 million for a 40 percent stake, and the other containing Kindred’s 77 long-term acute care hospitals and 19 rehabilitation centers. Humana had touted the deal’s potential to align its Medicare Advantage membership with home health services.

Kindred had initially said it expected the sale to close by this summer.