Kindred Healthcare to acquire RehabCare

Kindred Healthcare has announced plans to acquire the St. Louis-based RehabCare Group, creating what officials say will be the largest post-acute healthcare services company in the nation, with more than $6 billion in annual revenues and operations in 46 states.

If completed, the transaction will create a company operating 118 long-term acute care hospitals with 8,492 licensed beds, 226 nursing and rehabilitation centers with 27,442 licensed beds, 121 inpatient rehabilitation  hospitals (primarily hospital-based units) and 1,808 hospital, nursing center and assisted living rehabilitation therapy services contracts across the country.

[See also: Kindred acquires 5 California hospitals, 3 Texas nursing homes]

"We are excited to announce the RehabCare acquisition and we believe that the combination will be highly accretive for Kindred stockholders, provide significant long-term strategic benefits to the stockholders of both companies and enhance our future growth prospects,” said Paul J. Diaz, president and chief executive officer of Kindred.

“The expansion of our size and scale and the opportunities to integrate RehabCare's LTAC and IRF hospitals and rehabilitation therapy contract business with our operations will create a stronger company both nationally and locally and create value for all of our constituents in the communities we serve,” he said. “We are particularly excited about the opportunity to add RehabCare's services in our cluster markets and inpatient rehabilitation services to our service offerings."

“Together with our growing home care and hospice businesses, the merger offers our patients an expanded continuum of services and the opportunity for us to ‘Continue the Care’ for our patients and residents through an entire episode of treatment and recovery,” Diaz said.

Under the terms of the merger agreement, two members of the RehabCare board of directors will join the Kindred board following consummation of the transaction.

In addition, each holder of RehabCare common stock will receive $26 per share in cash and 0.471 of a share of Kindred common stock. Based upon the average value of Kindred common stock, as defined, during the 10 trading days preceding the signing of the merger agreement, each RehabCare stockholder will receive consideration with a current value of approximately $35 per share.

Kindred expects to issue approximately 12 million shares in connection with the pending transaction. The aggregate value of the pending transaction approximates $1.3 billion, including approximately $400 million of existing indebtedness.

Kindred officials say the transaction will be highly accretive to earnings and operating cash flows, exclusive of one-time items related primarily to the pending merger, immediately upon closing. In connection with the pending transaction, Kindred expects the combined company to achieve operating synergies of approximately $40 million within a period of two years after the deal, with $25 million expected in the first year after closing.

[See also: Kindred Healthcare expands borrowing capacity by $100M ]

Subject to certain conditions as well as market conditions, Kindred expects to have in place approximately $1.9 billion of long-term financing, of which approximately $1.6 billion is expected to be outstanding at the time of consummation of the pending transaction.

The RehabCare acquisition is subject to certain conditions, including approvals by the stockholders of both companies, consummation of financing in accordance with the commitment letters, clearance of the notification to the Federal Trade Commission under the provisions of the Hart-Scott-Rodino Act of 1976, as amended, and the receipt of certain licensure and regulatory approvals. Officials expect the pending transaction will be completed on or about June 30, 2011.

"Our combination with Kindred delivers significant value to our stockholders and provides an opportunity to share in the future growth of the combined company, said John H. Short, PhD, president and CEO of RehabCare. “We share the same commitment to delivering leading-edge post-acute care that improves lives, and we expect our patients, healthcare partners and professionals to benefit from the blending of our organizations."

Click on the next page to read pro forma financial information released by Kindred.

Pro Forma Financial Information

The pro forma financial projections assume that the pending transaction was consummated on Jan. 1, 2011, and include the projected results of the combined company for the year ended Dec. 31, 2011. Non-recurring costs and expenses associated with the pending transaction have been excluded from the pro forma financial projections. The pro forma financial projections assume that Kindred will realize approximately $25 million of operating synergies in the first year following consummation of the transaction.

Based upon the pro forma financial projections, revenues for the combined company should approximate $6.2 billion for the year ended Dec. 31, 2011. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $892 million to $909 million. Rent expense is expected to approximate $422 million, while depreciation, amortization and net interest expense are expected to approximate $303 million. Income from continuing operations for the year could approximate $101 million to $111 million or $1.95 to $2.15 per diluted share (based upon diluted shares of 51.2 million).

"The RehabCare acquisition offers a unique opportunity for significant growth and earnings accretion for Kindred stockholders without excessive leverage. We expect that the adjusted debt of the combined company, using a factor of six times rents, should approximate 4.5 at the end of 2011,” said Diaz.

“This compares to Kindred's stand-alone adjusted leverage of 4.4 at Dec. 31, 2010. In addition, the combined company's ability to generate considerable operating cash flows will allow for significant pay-downs of debt over the next few years," he said.