The $4.1 billion takeover of Kindred Healthcare Inc. has become the latest example of a deal pairing businesses once seen as strange bedfellows in the healthcare industry.
A consortium of insurer Humana Inc. and private equity firms Welsh Carson Anderson & Stowe and TPG Capital Management LP agreed to buy the U.S. healthcare services provider in an all-cash deal that will split Kindred into two separate companies.
One company would be named Kindred at Home and comprise the growing home health, hospice and community care businesses. The other half would be referred to as Kindred Healthcare, containing the remaining long-term acute care hospitals, inpatient rehabilitation facilities and contract rehabilitation services businesses.
Humana will pay about $800 million in cash to get a 40% share of Kindred at Home, with an option to acquire the rest of the company later from the two private equity firms.
Humana joins rival insurers in branching out into other segments of the healthcare industry through acquisitions after two significant efforts to consolidate failed.
Aetna Inc., whose attempted deal with Humana fell apart earlier this year, agreed to buy retail pharmacy chain CVS Health Corp. in a $69 billion deal announced Dec. 3. The Aetna-CVS combination would pave the way for a network of all-in-one treatment centers, allowing patients to seek common therapies, fill prescriptions and manage their health insurance plans.
Another large insurer, UnitedHealth Group Inc., has been diversifying by acquiring businesses outside the insurance space including healthcare service providers such as Surgical Care Affiliates Inc. and USMD Holdings Inc.
Meanwhile, Anthem Inc. has unveiled plans for an in-house pharmacy-benefit manager following the collapse of its merger with Cigna Corp..
A sensible split
Splitting Kindred into two entities makes sense as no incremental volume seems to be flowing from the company's inpatient rehabilitation facilities to its home health business, Mizuho Securities' analyst Sheryl Skolnick said in a Dec. 18 note in response to a Wall Street Journal report that the companies were in deal talks.
Kindred at Home, which serves about 130,000 patients daily through 40,000 caregivers, will have an implied enterprise value of $3.15 billion before expenses.
Humana said Kindred's home care business has about 65% overlap with the health insurer's individual Medicare Advantage membership, allowing the entities to build a collaborative advanced payment model.
Medicare Advantage is a type of health plan offered by private companies that have contracts with the federal government's Medicare medical insurance program for the elderly and disabled.
The deal will help Humana pursue its integrated care delivery model which aims to cut medical costs by providing treatment to consumers, including Humana members, at their home instead of in more expensive settings like clinics or hospitals.
"Humana will use Kindred at Home to execute its 'trend bender' strategy which aims to improve the health status of its Medicare Advantage members and reduce costly hospital admissions," analysts from research firm Cantor Fitzgerald wrote in a Dec. 19 note.
Separately, S&P Global Ratings said that its ratings on Humana and its subsidiaries would be unaffected by the investment, which fits the company's goal of increasingly integrating provider and health-plan activity to improve care process and experience.
Moody's said it has placed Kindred's ratings under review, saying about $3.2 billion of rated debt would be affected by the deal.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.