The Home Health & Hospice sector is gearing up for a busy 2018, compared with the sluggish performance turned so far in 2017. Two leading companies, LHC Group (NASDAQ: LHCG) and Almost Family (NASDAQ: AFAM) announced a “merger of equals” on November 16. That transaction followed third-quarter earnings calls from Amedysis (NASDAQ: AMED) and Brookdale Senior Living (NYSE: BKD) with each CEO discussing aggressive moves into the hospice sector. Bring it on!
M&A activity in the Home Health & Hospice sector has been slow, to say the least, throughout 2017. Prior to the LHC/Almost Family announcement, just 41 deals were reported through mid-November, with a meager $20.9 million in spending. With just six weeks left in the year, deal volume is 34% below 2016’s total of 62 transactions, and 98% lower than the nearly $1.2 billion spent in 2016.
A major factor behind the slowdown has been the proposed Home Health Groupings Model (HHGM) rule from the Centers for Medicare and Medicaid Services (CMS). The proposed model would have significantly changed the home health payment system and cut as much as $950 million from the system in 2019.
On November 1, CMS released its prospective payment system 2018 update without the HHGM rule. Stocks in public companies reacted positively, with Almost Family up 27%, Amedisys +14%, LHC Group +10% and Kindred Healthcare (NYSE: KND) and Encompass Home Health (NYSE: HLS) both up 7%. The news also made for more bullish comments in third-quarter earnings calls, as well.
The merger between Almost Family and LHC Group creates a company with 781 locations in 36 states, with more than 31,000 employees and revenue of $1.8 billion, and adjusted EBITDA of approximately $145 million for the trailing 12-month period ending September 30, 2017.
Under terms of the agreement, Almost Family shareholders will receive 0.9150 shares of LHC Group for each AFAM share, working out to a price of approximately $983 million, 1.3x revenue and 17.1x EBITDA.
Upon closing, LHCG shareholders will own 58.5% and AFAM shareholders will own 41.5% of the combined company. The stock issuance is expected to be tax-free to all shareholders.
The combined company will be called LHC Group, and trade under the NASDAQ symbol LHCG. This transaction is expected to close in the first half of 2018.
Kindred remains the largest home health provider, with 609 Kindred at Home home health, hospice and non-medical home care locations, as of September 30, 2017. The company reported $2.5 billion in revenues for the division in 2016.
Going forward, LHC Group may give Kindred a run for its money, given the very popular joint-venture model the legacy LHC Group has pursued in recent years. Its most recent transaction, announced on August 1st and closed on September 1st, was the majority ownership interest taken in Christus Health‘s home health and hospice services. The deal includes seven home health agencies, five hospice programs, two community-based home care services, one inpatient hospice unit and six long-term acute-care hospitals (LTACs). No financial terms were disclosed.
