On Monday, Gentiva Health Services, Inc. (GTIV) entered into a definitive agreement with Texas-based Odyssey HealthCare, Inc. (ODSY), a premier hospice care provider in the U.S., in order to purchase the company for approximately $1 billion. This constitutes an all-cash transaction for purchase of Odyssey’s common stock worth about $370.4 million, or $27 per share.
The deal is expected to close by the third quarter of 2010 upon the fulfillment of the standard closing conditions, which include regulatory approvals and clearance under the Hart-Scott-Rodino Act, as well as approval by Odyssey’s stockholders. Accordingly, Gentiva estimates to take the route of debt-funding in order to fund the acquisition and to refinance existing debt that totals to about $1.1 billion.
For the deal payment, Gentiva has been able to avail itself a financing assurance from a consortium of leading financial institutions such as BofA Merrill Lynch, a division of Bank of America Corp. (BAC), Barclays Bank Plc (BCS), General Electric Capital Corp. (GE), SunTrust Banks Inc. (STI) and SunTrust Robinson Humphrey Inc., a division of SunTrust.
While Edge Healthcare Partners LLC is acting as financial advisor to Gentiva, Greenberg Traurig LLP is acting as legal advisor. BofA Merrill Lynch and Barclays have served as advisors to Gentiva, and both firms are serving in lead advisor roles with respect to the financing of the acquisition. Across the table, Goldman Sachs & Co. (GS) is acting as financial advisor and K&L Gates LLP is acting as legal advisor to Odyssey.
Financial Impact
Through the acquisition of Odyssey, Gentiva expects to become a leading hospice care provider in the U.S. as the home health and hospice care operations of both firms fairly complement each other without overlapping their operations geographically and are known for their industry-leading services. Post-acquisition, Gentiva projects a collective average daily patient census of approximately 14,000 by expanding its operations in about 30 states.
Gentiva also expects to bring its innovative specialty home health programs and other Gentiva services to patients by broadening its scope with the purchase of Odyssey. The combined firm, in turn, is projected to earn about $1.8 billion in annual revenue, dramatically up from $1.15 billion earned by Gentiva alone in 2009.
Further, management expects 60% of this revenue to come from home healthcare revenue and the remainder from hospice care. Going forward, Gentiva anticipates the impact of the deal to be accretive to the operating earnings within the first year of incorporation, although certain one-time charges are also projected.
Our Take
Lately, the health care providing industry has been triggered by a flood of mergers and acquisitions (M&A) activity between home health and hospice providers. On Monday, a peer of Gentiva’s, LHC Group Inc., bought Idaho Home Health and Hospice for an undisclosed amount.
Overall, the brilliant performance of Gentiva in the first quarter, driven by higher volumes and revenue from its home health and hospice operations, has also paved the way for more acquisitions for the company.
On May 17, the company had also announced the acquisition of United Home to expand its operations in Louisiana. More M&A activities are expected in this space, particularly after the reimbursement rate cuts that are being introduced as healthcare reforms.
Gentiva’s diversified product portfolio pleases us and we believe the company’s inorganic growth performance has been exceptional, although its growth-by-acquisition strategy equivalently carries some amount of inherent risk of increasing debt and its related costs. Nevertheless, Gentiva’s history of generating significant leverage and modestly strong fundamentals help us gain optimism with regard to the Odyssey acquisition as well.
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