Monday, July 2, 2018

Tom Scully's WCAS Saddles KAH with Debt, Lightens Load for Kindred Healthcare

Kindred Healthcare is no longer be a publicly traded company as of Monday morning July 2nd.  The company has been divided between two private equity underwriters (PEU), Welsh, Carson, Anderson and Stowe (WCAS) and TPG Capital.  The pair will own Kindred's long term acute care and rehab hospitals, as well as its outpatient rehab services.  This division had $3.4 billion in revenue in 2017.  The two PEUs will share Kindred at Home, the home health, hospice and community care division with Humana, a minority 40% owner.  Kindred at Home had nearly $2.6 billion in revenue in 2017. 

The PEU boys paid $810 million to purchase Kindred's equity.  Humana ponied up $800 million for 40% of the Kindred at Home (KAH).  KAH comprised 42.5% of Kindred's 2017 revenues.  That means Humana paid 98.8% of the cash purchase price for the whole company for  a mere 17% of the company's 2017 revenues. 

Why would Humana CEO Bruce Broussard be so generous with Humana's ample cash resources?   Broussard worked for WCAS affiliate U.S. Oncology for six years, serving the last two as CEO.   WCAS got Broussard his first fortune and the Humana CEO is in position to return the favor.

WCAS General Partner Tom Scully lobbies for Alston and Bird's healthcare clients.  He lobbied for U.S. Oncology and other WCAS affiliates over the years.  Former Medicare Chief and for-profit hospital point man  Tom Scully once said "health investing is as safe as it comes."   

The PEU way is to buy distressed companies, influence Uncle Sam's wallet (in this case Medicare payment for home health/hospice), conduct sponsor repackaging (by adding Curo Healthcare) and flip to a generous buyer, cash rich Humana.

Majority PEU owned Kindred at Home will soon close on the $1.4 billion Curo acquistion.  KAH/Curo will be saddled with $3 billion in debt courtesy of its new PEU owners.  Oddly, the LTAC/Rehab hospital side will have its debt load lightened by nearly 2x EBITDA.  The home care-hospice side will see leverage increase to "very high" levels.

Shouldn't Humana's $800 million in cash enable less leverage for Kindred at Home?   That's not the way this PEU ball is bouncing.  Mr. Scully will do his PEU lobbying best to ensure Kindred's various post acute care pieces make huge returns for its private equity owners.  That generally bodes ill for employees and patients.

Kindred employees in both divisions:  Prepare to be scullied by your new owners.  Greed is ugly.

Update 7-5-18:  Kindred isn't the only healthcare firm going PEU

Update 7-9-18:   ModernHealthcare reported on the PEU healthcare pattern.