NEW YORK--(BUSINESS WIRE)--Brigade Capital Management, LP (“Brigade”), on behalf of funds managed by it, today released its letter to the CEO and Board of Directors (the “Board”) of Kindred Healthcare, Inc. (NYSE:KND) (“Kindred” or the “Company”) definitively stating its intention to vote “NO” to the proposed acquisition of the Company by a consortium of Humana, TPG Capital and Welsh, Carson, Anderson & Stowe. In its letter, Brigade cited the following reasons for its opposition:
- the ill-timed sale short-changes stockholders and transfers significant value to the buyers; and
- suspicious downward revisions to Kindred’s projections raise serious questions about management’s motivation, which Kindred’s pre-merger disclosures fail to address, let alone answer.
The letter details Brigade’s view that the sale is ill timed and provides specific examples of the shortcomings in management’s projections and motivations relating to the transaction. A copy of the letter accompanies this press release.
Brigade applauded Institutional Shareholder Services (“ISS”) for acknowledging concerns in its March 16, 2018 report over the sales process and the lack of premium offered in the proposed transaction. Brigade stated that ISS seemingly placed undue weight on management’s and the Board’s self-interested and newly revised view that remaining independent outweighs the risks of navigating the regulatory environment and managing its capital structure. ISS stated at the current offer price the acquirer group has the potential to earn a substantial return on its investment, which return Brigade contends the shareholders are not being paid for at the current transaction price. ISS also does not address management’s lack of explanation for the seemingly self-serving series of downward adjustments to its projections used in the fairness opinion analysis, thereby skewing those conclusions.
In its letter, Brigade urges other Kindred shareholders to vote “NO” to the proposed transaction and urges the Board and management to immediately evaluate and reconstitute themselves with new members who are focused on building rather than selling the Company, and who are mandated to follow the pre-transaction strategic direction previously outlined by management.
On December 19, 2017, Kindred announced it entered into an agreement and plan of merger with affiliates of Humana, TPG Capital and Welsh, Carson, Anderson & Stowe. On December 27, 2017, Brigade announced its opposition to the proposed acquisition in a letter to the Board. In that letter, which remains unanswered, Brigade voiced its intention to vote against the proposed acquisition and asked the Board to reconsider its decision, based on Brigade’s belief that the proposed sale severely undervalues the Company and ensures that the buyers – rather than existing shareholders – will reap the benefits of the value enhancement the improved Kindred business is expected to generate. Kindred has since filed proxy materials partially detailing the background and reasoning for the proposed sale. However, after its review of these materials, Brigade believes even more strongly that the proposed acquisition is ill timed and value minimizing.
On March 8, 2018, funds managed by Brigade filed a lawsuit in the Delaware Court of Chancery against the Board and certain other parties alleging breaches of fiduciary duties and related causes of action, and seeking to preliminarily and permanently enjoin the March 29, 2018 vote of Kindred shareholders on the proposed acquisition. Brigade intends to vigorously prosecute the action to protect its investors from the consequences of the breaches of fiduciary duties if the proposed acquisition is allowed to close.
March 19, 2018
Benjamin A. Breier
President and Chief Executive Officer
Kindred Healthcare, Inc.
680 South Fourth Street
Louisville, Kentucky 40202
Re: Acquisition of Kindred Healthcare by TPG Capital, LLC, Welsh, Carson, Anderson & Stowe and Humana Inc. for $9.00 per Share
Dear Mr. Breier:
As you know, we are long-term shareholders of Kindred Healthcare, Inc. (“Kindred” or the “Company”). Funds managed by us presently own 5.7% of the outstanding shares of Kindred’s common stock.
We write to express our continued opposition to the proposed acquisition of Kindred by TPG, WCAS and Humana. For the reasons set forth in our December 27, 2017 open letter, and in light of the Board’s inadequate and misleading proxy disclosures, we intend to vote against the proposed acquisition and urge other Kindred shareholders to do the same.
We are aware that Institutional Shareholder Services (“ISS”) issued their report on March 16, 2018, recommending a vote for the proposed transaction. We think it is telling that ISS highlights concerns over the sales process and the lack of premium offered in the proposed transaction, and that ISS believes at the current $9 per share purchase price “the acquirer group has the potential to earn a substantial return on its investment.” We respectfully disagree, however, with ISS’s apprehension about Kindred remaining independent and its recommendation to Kindred shareholders to accept this inadequate transaction. ISS acknowledges our point that the “Board could have negotiated a better deal [for] shareholders, especially after CMS decided not to move forward with its proposal to reduce reimbursement rates.” ISS, however, appears to place undue weight on management’s and the Board’s self-interested view that remaining independent outweighs the risks of rewarding Kindred’s existing shareholders by navigating the regulatory environment and managing the Company’s capital structure. Management has highlighted on numerous investor conference calls that Kindred has made substantial progress moving past the distractions associated with its business unit restructuring and the complicated divestiture of its skilled nursing facilities. Building on that positive momentum and factoring in the improved regulatory and tax environment, Kindred is positioned to remain a strong standalone company, with the tools to drive improved cash flow and significant incremental value for its existing shareholders. Furthermore, as we discuss below, we think it is important for management to explain to its shareholders (and ISS) why it made a series of downward adjustments to the financial forecast used in the fairness analysis and discuss in detail how the Tax Cuts and Jobs Act of 2017 is expected to positively impact Kindred’s unleveraged free cash profile (which was not used in the fairness opinion analysis) going forward.
The Ill-Timed Sale Short-Changes Stockholders and Transfers Significant Value to the Buyers
In our December 27 letter, which went unanswered, we implored the Board to reconsider its ill-timed and value-minimizing decision to sell. Rather than consummate a sale that harms shareholders, Kindred should instead focus its efforts on its repeatedly stated goal to investors – generating shareholder value as an independent going concern. The Company has ample liquidity, a flexible capital structure and is on a path to generate significant core free cash flow from continuing operations and deleverage its balance sheet. Significant disruptions, like the now-moot CMS Home Health Groupings Model (“HHGM”) Proposal and the one-time effects of Hurricanes Harvey and Irma in the third quarter of 2017, are in the rear-view mirror. The Company shed its low-multiple Skilled Nursing business, the full economic benefits of which have yet to be recognized. And a restructured captive insurance entity has freed up over $280 million to pay down debt and strengthen the balance sheet.
Against this backdrop, the 27% premium over Kindred’s 90-day VWAP as of December 15, 2017 is highly misleading, and certainly does not justify a $9 per share valuation. The market price of Kindred’s stock in the three months prior to December 15 was totally unmoored from the Company’s intrinsic value. The downward pressure on the Company’s stock price, as Kindred completed its restructuring and weathered temporary headwinds, only fully dissipated late last year, and Kindred is positioned for significant stock price appreciation. This is the story management has been articulating to investors for the last two years, further illustrated by the fact that the Company’s stock price closed at $8.60 per share the last trading day before the transaction was announced, and has consistently traded above $9 ever since (closing at $9.45 per share last Friday).
By rushing headlong into a sale, the Board has missed out on numerous opportunities to maximize value in an improving business and regulatory environment.
- Most critically, the Board and management did not go back to the bargaining table following CMS’s decision to not finalize the HHGM Proposal, removing a significant overhang. We view this as an abrogation of the Board’s basic duty to secure maximum value for Kindred’s existing shareholders.
- Meanwhile, the Bipartisan Balance Budget Act of 2018 (“BBA”) significantly improves the Company’s near-term earnings visibility and provides Kindred with additional time and flexibility to minimize disruption caused by regulatory policy changes. As a result, the BBA reduces risk and drives incremental shareholder value. But the proposed transaction was approved and announced shortly before the BBA was signed into law.
- The Board also seems willing to ignore the significant positive impact the Tax Cuts and Jobs Act of 2017 (the “Tax Bill”) is expected to have on Kindred’s go-forward cash flow and, in turn, value. The Company’s own supplemental proxy, issued on March 6, illustrates that Kindred’s unlevered free cash is expected to increase by over $50 million per year as a result of the Tax Bill. The supplemental proxy also makes clear, however, that this materially improved unleveraged free cash flow forecast was not used in the fairness analysis performed to evaluate the proposed transaction.
- Tellingly, since December 15th (the last trading day before news of the transaction was released), valuations of Kindred’s publicly traded Homecare- and Facilities-focused peers have increased materially. Assuming Kindred’s stock price had not been artificially constrained by the proposed transaction and instead was able to fully realize the benefits of the improved regulatory and tax environment now buoying its publicly traded peer group, Kindred stock could trade in the mid-teens when evaluated in a similar manner.1
By failing to capitalize on these and other material positive developments, the Board is passing on to the buyers meaningful value that rightly belongs to Kindred’s shareholders. This lack of effort on behalf of Kindred’s owners is disappointing in light of the Company’s repeated promises that long-term shareholders would be rewarded for their loyalty, as Kindred put its restructuring behind it and turned the corner into 2018. If the proposed transaction is approved on March 29, stockholders will be left with nothing more than $9 per share and these hollow promises.
Convenient Downward Revisions to Kindred’s Projections Raise Questions about Management’s Motivation, Which the Company’s Pre-Merger Disclosures Fail to Address, Let Alone Answer
We expressed hope on December 27 that the Company’s proxy materials would give the critical details necessary to justify a $9 per share sale price. Having reviewed these proxy materials in detail, however, it is now clear that the case for selling the Company is even weaker than we first believed.
We are most troubled by management’s conveniently timed December 15, 2017 decision to include several downward adjustments to the Company’s five-year forecast that was provided to Kindred’s financial advisors as a basis for their fairness analyses. This occurred shortly after management began negotiating their go-forward employment contracts with the buyer group. But it also occurred after CMS decided not to finalize its HHGM Proposal. The tension is obvious. With perhaps the Company’s strongest headwind removed, it would be reasonable to revise future projections upwards, in an attempt to secure more value from a sale. But the opposite happened. Then, after these downward revisions, management also recommended or approved the use of several additional conservative assumptions in the fairness opinions analysis, including treating stock option expenses as cash, equating (contrary to guidance) depreciation to CapEx, and using a terminal growth rate below inflation and the compound annual growth rate of the business during the 2017-2022 period, even with the above-noted downward adjustments already incorporated into the forecast. The proxy materials provide no explanation or discussion of the drivers behind this bleak outlook.
Because the proxy materials do not disclose any analysis to justify these revised assumptions, we are left to wonder whether management with newfound skin in the game had an incentive to incorporate a more pessimistic outlook into the financial projections to support a $9 per share valuation. The silence in the proxies is deafening, particularly in light of the fact that the proxies also do not disclose senior management’s go-forward compensation and employment agreements with the acquirers. Given the suspicious timing, and with management’s incentives divorced from the shareholders’ interests, the Company needs to (at a minimum) make significant additional disclosures regarding management’s fresh conservatism, including the key assumptions provided by management in forecasting the future performance of the Company’s major business segments. Shareholders also deserve to know how, if at all, members of senior management with a role in the successor companies are rolling their stock and getting paid going forward, if these executives are at the same time telling Kindred’s owners to be happy with $9 per share. Without this information, it is simply impossible for us, or any other Kindred shareholder, to cast an informed vote in favor of the transaction.
The proxy also fails to disclose critical information about the process put in place to protect against a conflicted Kindred director who is also affiliated with TPG. We are presently pursuing expedited discovery in the Delaware Court of Chancery to evaluate this conflict and whether it undermined the Board’s sales process and/or prevented the Board from maximizing price. We emphasize here that filing suit was not our preferred path, nor is shareholder activism our preferred strategy. But we have a responsibility to our investors to protect them from what we see as clear consequences of the Board’s breaches of its fiduciary duties, including in connection with a potential debilitating conflict.
Reject the Proposed Transaction and Request that the Board Immediately Begin a Reconstitution Program
In light of this ill-timed transaction that plainly and materially undervalues the Company, we urge Kindred shareholders to reject $9 per share and vote against the transaction. The Company is poised for improved growth and stronger free cash flow generation, which can be used to deleverage and drive material share price appreciation. Kindred has ample liquidity, no near-term funded debt maturities, and will have the ability to refinance its relatively high-cost-fixed-rate debt (and can thus avoid paying the significant early redemption penalties that are contemplated and factored into the proposed transaction). Furthermore, there is a $5 to $6.64 per share cost related to splitting up the Company (as set forth in the proxy materials) – which the buyers will incur if the merger is consummated and therefore will have surely factored into their valuation of Kindred when coming up with the $9 per share bid – which will be avoided by voting against the transaction. These cost savings will drive immediate shareholder value.
* * * * *
Should shareholders reject the proposed transaction, we expect the Company and the Board to begin an orderly transition to new leadership via a prompt board refreshment program and thorough review of the Company’s senior leadership and strategic direction, aided by the numerous favorable regulatory developments highlighted in this letter. We believe the Board should conduct its own thoughtful evaluation of its membership. The Board should nominate directors who rightly focus on creating meaningful, rather than lackluster, shareholder value, and who engage and then mandate a capable management team that believes in and can execute upon the strategic direction outlined by the Company over the last two years. Indeed, the Board is obligated by its fiduciary duties to nominate candidates who possess these characteristics and who are qualified to steward the Company in this strategic direction. And, it is up to us, as the very essence of corporate democracy, to exercise our franchise as shareholders by voting in support of candidates we deem qualified.
The Board needs new perspectives and additional focus on holding senior leadership accountable for performance, relative to reasonable Board-approved expectations. Improved investor communication coupled with execution against clearly defined clinical quality and financial targets will drive material shareholder value and serve to increase the attractiveness of Kindred to potential business partners and/or acquirers at a more appropriate time and at a valuation that more accurately reflects Kindred’s present business and bright future prospects.
Rejecting the proposed transaction and taking a fresh look at Kindred leadership is the only step open to Kindred shareholders to ensure that their interests are protected. We would embrace the opportunity to open a dialogue with the Board about these issues, and welcome any questions directly from any member of the Board.
Donald E. Morgan, III
cc: The Board of Directors
About Brigade Capital Management, LP
Brigade Capital Management, LP is an SEC-registered investment advisor focusing on investing in the global high-yield market and levered equities. The firm was founded in 2006 and is managed by Donald E. Morgan, III, CIO and Managing Partner. The firm is headquartered in New York City with offices in the United Kingdom, Japan and Australia. The firm employs a multi-strategy, multi-asset class investment approach focused on leveraged balance sheets. The core strategies include long/short credit, distressed debt, capital structure arbitrage and levered equities. Brigade Capital Management, LP’s investment process is fundamentally driven, focusing on asset coverage and free cash flow, with an emphasis on capital preservation. The team possesses deep sector expertise throughout the entire leveraged finance market and has extensive experience in capital restructurings and bankruptcy reorganization.
1 Uses data from Bloomberg and assumes an increase in Kindred’s enterprise value in line with the average percent change in enterprise value for the Company’s Homecare (Addus Homecare, Amedisys, Chemed and LHC Group) and Facilities (Encompass Health, Ensign Group, and Select Medical Holdings) focused peer group, weighted by the proportional pre-corporate core segment adjusted operating income contribution to Kindred from these business segments.