Page 16 of 18 – SEC Filing
| · | Tellingly, since December 15th (the last trading day before news of the transaction was released), valuations of Kindred’s publically 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 publically 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.
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[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.
