The Health Care M&A Monthly: Gentiva Buys Odyssey HealthCare--

Expands Hospice Business In Billion-Dollar Deal

Gentiva Health Services, Inc. (NASDAQ: GTIV) recently announced a deal to acquire hospice care provider Odyssey HealthCare (NASDAQ: ODSY) for nearly $1.0 billion. In doing so, it took the latest in a long series of steps over the past decade to reinvent itself. Once this deal closes, Gentiva will have repositioned itself as one of the country’s largest providers of home health care and hospice services to the elderly.

Based in Atlanta, Gentiva Health provides home health care services to the elderly from 250 locations in 35 states. On a trailing 12-month basis, GTIV generated revenue of $1.2 billion, EBITDA of $136.0 million and net income of $62.0 million.

The company was not always such a focused operation. When it was spun off from its parent Olsten Corp. in 2000, it divested its staffing business to Intelistaf for $66.5 million; in 2002, it sold off its specialty pharmacy operations to Accredo Health for $462.3 million; in 2008, it sold its CareCentrix ancillary benefit management operations to Water Street Capital Partners for $135.0 million; in 2009, it divested its pediatric home care business to Andventure; and earlier this year, it sold its respiratory therapy, infusion therapy and HME business to Lincare (NASDAQ: LNCR) for $16.4 million. As it sold off these noncore lines, it steadily acquired home health operations and, beginning in 2005, hospice and palliative care businesses.

Founded in 1996, Odyssey HealthCare is one of the country’s largest leading providers of hospice and palliative services to the terminally ill. It operates 90 Medicare-certified hospice programs in 29 states. On a trailing 12-month basis, the company generated revenue of $690.4 million, EBITDA of $86.2 million and net income of $45.8 million.

Odyssey took part in the rapid expansion of the hospice industry in general, and the for-profit segment of that industry in particular, during the first decade of the new millennium. According to a recent report from the Medicare Payment Advisory Commission, for-profit hospices accounted for one-third of the 2,300 hospices in 2001, while in 2008, they accounted for 52% of the 3,390 hospices. As a leader in this growth industry, ODSY became an obvious and attractive takeover candidate.

Under terms of the deal, Gentiva is offering to pay $27.00 per share in cash, for a total of $912.3 million, and assuming $71.9 million in long-term debt for a net purchase price of $984.2 million. To fund this acquisition as well as refinance its existing debt, Gentiva is raising $1.1 billion from a syndicate that includes Bank of America Corp., Barclays PLC and General Electric Co. (NYSE: GE).

This acquisition offers Odyssey shareholders a 40% premium to the stock’s prior-day price. The pertinent acquisition multiples are 1.4x revenue and 11.4x EBITDA.  While the deal does increase Gentiva’s debt, its free cash flow will allow the company to pay it down quickly. Synergies may be expected from sharing marketing, staff recruting and referral operations.

This transaction, due to close in the third quarter, transforms Gentiva into the country’s largest provider of home health and hospice services with a daily census of 14,000 patients and over $1.8 billion in revenue. As an indication of just how fragmented the industry is, this deal is unlikely to draw antitrust scutiny as there is little geographic overlap. The resulting company will focus on the elderly, essentially the Medicare-eligible population. With the threat of changes to reimbursement protocols stemming from health care reform, operators perceive strength in size and numbers. As the smaller operators are squeezed, we may expect further consolidation in the hospice care market at the lower end of the market.

Edge Healthcare Partners provided Gentiva with financial advice; Goldman Sachs provided Odyssey with similar advice.