Page 15 of 18 – SEC Filing
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. |
