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Kindred Acquisition May Signal More Deals in Health

Kindred Healthcare Inc.’s purchase of RehabCare Group Inc. may signal more acquisitions as health-care providers aim to expand services in response to government efforts to reduce costs.

“The attractive candidates” for future takeovers include Emergency Medical Services Corp., an ambulance company, and HealthSouth Corp., an operator of rehabilitation centers, said Arthur Henderson, an analyst at Jefferies & Co. in Nashville, Tennessee. Kindred announced today that it will buy RehabCare for about $877 million in cash and stock to become the largest U.S. provider of rehabilitation services.

Government health-care plans are looking to bundle payments for coverage, spurring consolidation among providers and sparking the interest of private-equity firms. Reducing the costs of Medicare and Medicaid was a goal of the health overhaul signed into law by President Barack Obama last year.

“It’s an exciting time from an investment perspective because there’s a lot of transactions and a lot of opportunity,” Henderson said today in a telephone interview.

Deborah Hileman, a spokeswoman for Greenwood Village, Colorado-based Emergency Medical Services, declined to comment. Helen Todd, a spokeswoman for Birmingham, Alabama-based HealthSouth, didn’t immediately return an e-mailed request for comment.

RehabCare’s Payoff

RehabCare’s investors will receive $26 in cash and 0.471 Kindred share for each RehabCare share, the companies said in a statement today. The agreement values St. Louis-based RehabCare at $35.18 a share, 38 percent above yesterday’s closing price. Louisville, Kentucky-based Kindred also will assume about $400 million of RehabCare debt.

Kindred gained $5.52, or 28 percent, to $25 at 4:15 p.m. in New York Stock Exchange composite trading, the biggest jump since trading began in 2001. RehabCare rose $11.58, or 45 percent, to $37.05, the most since its 1991 initial public offering.

The combined company will have more than $6 billion in annual revenue and operations in 46 states when the transaction is completed, which the companies said they expect to occur around June 30. The takeover values RehabCare at $1.28 billion including net debt, or 9.6 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. Buyers paid a median of 9.7 times earnings for recent acquisitions in the industry.

Smaller Acquisitions

“Generally, I think you’re going to see much smaller acquisitions” going forward because few companies are as large as Kindred with $4 billion in stand-alone revenue, said K. Newton Juhng, an analyst at FBR Capital Markets & Co. in New York, in a telephone interview today.

Morgan Stanley provided financial advice to Kindred, and Cleary Gottlieb Steen & Hamilton LLP served as legal adviser. RehabCare used bankers from Citigroup Inc., with Armstrong Teasdale LLP as legal adviser and Bryan Cave LLP as legal adviser to the board. RBC Capital Markets LLC provided a fairness opinion to RehabCare.

The combined company will operate 118 long-term acute care hospitals, 226 nursing and rehabilitation centers, 121 inpatient rehabilitation hospitals and 1,808 hospital, nursing center and assisted living rehabilitation therapy services contracts.

“We believe that this transaction will be highly accretive to Kindred earnings and will create significant value for the stockholders for both companies,” Kindred Chief Executive Officer Paul Diaz told investors on a conference call.

Home-Health Services

Future deals are more likely to involve home-health services instead of long-term acute care hospitals, where Kindred and Select Medical Holdings Corp. of Mechanicsburg, Pennsylvania, now have half the market, Eugene Goldenberg, an analyst at BB&T Capital Markets in New York, said today.

“Health-care reform is causing providers to figure out how to care for patients more efficiently,” Goldenberg said. “Anyone who deals with Medicare or Medicaid is looking at a very tough reimbursement environment.” Medicare is the U.S. program that helps the elderly and disabled, while Medicaid is the federal-state health plan for the poor.

Home health is the fastest-growing area of long-term care and the four publicly held companies -- Amedisys Inc., Gentiva Health Services Inc., Almost Family Inc. and LHC Group Inc. -- are trading below their value, according to Goldenberg.

“You’re likely to see much more consolidation in the home-health and hospice business,” he said in a telephone interview. “It’s a very high-growth and highly fragmented market.”

Eric Elliott, a spokesman for LHC Group in Lafayette, Louisiana, said “We’re not looking to be acquired.”

Scott Cianciulli, a spokesman for Atlanta-based Gentiva, said the company doesn’t comment on speculation or rumors as a matter of policy. Todd Lyles, a spokesman for Louisville-based Almost Family, wasn’t immediately able to comment. A call to Jacqueline Valencia of Baton Rouge, Louisiana-based Amedisys wasn’t immediately returned.

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