Kindred Healthcare, Inc. (“Kindred”) (NYSE:KND) announced that
it has completed the previously announced acquisition of RehabCare
Group, Inc. (“RehabCare”) (formerly NYSE:RHB) (the “Merger”). Upon
consummation of the Merger, each issued and outstanding share of
RehabCare common stock was converted into the right to receive
0.471 of a share of Kindred common stock and $26 per share in cash,
without interest (the “Merger Consideration”). Kindred will issue
approximately 12 million shares in connection with the Merger.
As a result of the Merger, Kindred is the largest and most
diversified post-acute healthcare services company in the United
States based upon revenues with operations in 46 states. On June 1,
2011, the combined company operated 121 long-term acute care
(“LTAC”) hospitals, 118 inpatient rehabilitation facilities
(“IRFs”) (primarily hospital-based units), 224 nursing and
rehabilitation centers and is the largest provider of
rehabilitation therapy contract services with approximately 1,870
rehabilitation therapy contracts. Following the Merger, Kindred
will have approximately 76,000 employees.
New Credit Facilities
In connection with the Merger, Kindred announced today that it
entered into a new $650 million senior secured asset-based
revolving credit facility (the “ABL Facility”), a new $700 million
senior secured term loan facility (the “Term Loan Facility”) and
successfully completed its private placement of $550 million senior
notes due 2019 (the “Notes”). Kindred used proceeds from the ABL
Facility, the Term Loan Facility and the Notes to pay the Merger
Consideration, repay all amounts outstanding under Kindred’s and
RehabCare’s existing credit facilities and to pay transaction
costs. The ABL Facility and the Term Loan Facility have incremental
facility capacity in an aggregate amount between the two facilities
of $200 million, subject to meeting certain conditions, including a
specified senior secured leverage ratio.
All obligations under the ABL Facility and the Term Loan
Facility are fully and unconditionally guaranteed, subject to
certain exceptions, by substantially all of Kindred’s existing and
future direct and indirect domestic 100% owned subsidiaries, as
well as certain non-100% owned domestic subsidiaries as Kindred may
determine from time to time in Kindred’s sole discretion. The Notes
are guaranteed by substantially all of Kindred’s domestic 100%
owned subsidiaries.
The agreements governing the ABL Facility, the Term Loan
Facility and the Notes include a number of restrictive covenants
that, among other things and subject to certain exceptions and
baskets, impose operating and financial restrictions on Kindred and
its restricted subsidiaries. In addition, Kindred is required to
comply with a minimum fixed charge coverage ratio and a maximum
total leverage ratio. These financing agreements also contain
customary affirmative covenants and events of default.
ABL Facility
The ABL Facility has a five year tenor and is secured by a first
priority lien on eligible accounts receivable, cash, deposit
accounts, and certain other assets and property and proceeds from
the foregoing (the “First Priority ABL Collateral”). The ABL
Facility has a second priority lien on substantially all of the
other assets and properties of the combined company. As of the
closing of the Merger, Kindred had approximately $275 million
outstanding on the ABL Facility. In addition, approximately $13
million of letters of credit were issued under the ABL Facility to
backstop outstanding letters of credit previously issued by
RehabCare under its terminated credit facility.
Borrowings under the ABL Facility bear interest at a rate per
annum equal to the applicable margin plus, at Kindred’s option,
either (1) the London Interbank Offered Rate (“LIBOR”) determined
by reference to the costs of funds for eurodollar deposits for the
interest period relevant to such borrowing adjusted for certain
additional costs, or (2) a base rate determined by reference to the
highest of (a) the prime rate of JPMorgan Chase Bank, N.A., (b) the
federal funds effective rate plus one-half of 1.00% and (c) LIBOR
as described in subclause (1) plus 1.00%. The initial applicable
margin for borrowings under the ABL Facility will be 2.75% with
respect to LIBOR borrowings and 1.75% with respect to base rate
borrowings. Commencing with the completion of Kindred’s first
fiscal quarter ending after the Merger, the applicable margin is
subject to adjustment each fiscal quarter, based upon average
historical excess availability during the preceding quarter.
Term Loan Facility
The Term Loan Facility has a tenor of seven years and is secured
by a first priority lien on substantially all of the combined
company assets and properties other than the First Priority ABL
Collateral and a second priority lien on the First Priority ABL
Collateral.
Borrowings under the Term Loan Facility bear interest at a rate
per annum equal to an applicable margin plus, at Kindred’s option,
either (1) LIBOR determined by reference to the costs of funds for
eurodollar deposits for the interest period relevant to such
borrowing adjusted for certain additional costs, or (2) a base rate
determined by reference to the highest of (a) the prime rate of
JPMorgan Chase Bank, N.A., (b) the federal funds effective rate
plus one-half of 1.00% and (c) LIBOR described in subclause (1)
plus 1.00%. LIBOR is subject to an interest rate floor of 1.50%.
The initial applicable margin for borrowings under the Term Loan
Facility will be 3.75% with respect to LIBOR borrowings and 2.75%
with respect to base rate borrowings. Kindred expects to enter into
one or more interest rate swap agreements to fix the interest rates
on a portion of the borrowings under the Term Loan Facility.
Notes
In connection with the Merger, Kindred completed a private
placement of $550 million aggregate principal amount of 8.25%
senior notes due 2019 (the “Notes”) through its 100% owned
subsidiary Kindred Escrow Corp. (“Escrow Issuer”). Immediately
following the closing for the sale of the Notes and the
consummation of the Merger, Kindred assumed all of Escrow Issuer’s
obligations under the Notes and the related indenture and the
subsidiary guarantors of the Notes also became parties to the
indenture. Escrow Issuer was concurrently merged with and into
Kindred.
The Notes bear interest at an annual rate equal to 8.25% and are
senior unsecured obligations of Kindred and the subsidiary
guarantors, ranking pari passu with all of their respective
existing and future senior unsubordinated indebtedness. The
indenture contains certain restrictive covenants that will, among
other things, limit Kindred’s and its restricted subsidiaries’
ability to incur, assume or guarantee additional indebtedness; pay
dividends, make distributions or redeem or repurchase capital
stock; restrict dividends, loans or asset transfers from its
subsidiaries; sell or otherwise dispose of assets; and enter into
transactions with affiliates. These covenants are subject to a
number of limitations and exceptions. The indenture also contains
customary events of default.
The Notes have not been registered under the Securities Act of
1933, as amended (the “Securities Act”) or any state securities
laws or any other jurisdiction and may not be offered or sold in
the United States without registration under the Securities Act or
an applicable exemption from registration requirements. The Notes
were offered only to qualified institutional buyers in accordance
with Rule 144A under the Securities Act and to certain non-United
States persons in offshore transactions in accordance with
Regulation S under the Securities Act. Pursuant to a registration
rights agreement, Kindred has agreed to use its commercially
reasonable efforts to file with the Securities and Exchange
Commission (the “SEC”) a registration statement relating to an
offer to exchange the Notes for an issue of SEC-registered notes
with substantially identical terms.
Management Commentary
Paul J. Diaz, President and Chief Executive Officer of Kindred,
commented, “The combination of Kindred and RehabCare will provide
more opportunities for our patients, employees and other
stakeholders. Together, we will continue to deliver superior
clinical outcomes and expand our service offerings to better
transition patients home with a full and efficient recovery. We
believe the Merger will be highly accretive to earnings for Kindred
stockholders, provide significant long-term strategic benefits and
enhance our future growth prospects. The expansion of our size and
scale and the opportunities to integrate RehabCare’s LTAC
hospitals, IRFs and rehabilitation therapy contract business with
our operations will create a stronger company that is better
positioned to compete in an evolving and more integrated healthcare
environment. We expect that the combined company will achieve
operating synergies of approximately $40 million within a period of
two years following consummation of the acquisition, with $25
million expected in the first year after closing. We are
particularly excited about the opportunity to add RehabCare’s
services in our cluster markets and inpatient rehabilitation
services to our service offerings. Together, with our growing home
care and hospice businesses, the Merger offers our patients,
healthcare partners and customers an expanded continuum of services
and the opportunity for us to “Continue the Care” for our patients
and residents through an entire episode of treatment and
recovery.”
Appointment of New Directors and Officers
Kindred is also pleased to announce the appointment of Mr. John
Short, Ph.D., and Mr. Christopher Hjelm to the Kindred Board of
Directors. Dr. Short served as President and Chief Executive
Officer of RehabCare since May 2004 and as a director of RehabCare
since 1991. Mr. Hjelm served as director with RehabCare since 2007
and currently serves as Senior Vice President and Chief Information
Officer at The Kroger Company, where he has been employed since
2005. Prior to joining The Kroger Company, Mr. Hjelm served as the
Chief Information Officer for the Travel Distribution Services
division of Cendant between December 2004 and July 2005.
Kindred also announced the appointment of three key senior
executives from RehabCare as officers of Kindred. Mr. Brock
Hardaway, former Executive Vice President, Operations for
RehabCare, will serve as Executive Vice President, Operations,
Hospital Division Southwest Region; Ms. Patricia M. Henry, former
Executive Vice President, Skilled Nursing and Rehabilitation
Services, will serve as Executive Vice President, SRS; and Ms. Mary
Pat Welc, former Senior Vice President, Operations, Hospital
Rehabilitation Services, will serve as Senior Vice President,
Operations, HRS. These three senior operators of RehabCare will
continue to manage substantially all of the RehabCare operations
acquired by Kindred.
Mr. Diaz commented, “I am also excited to welcome the dedicated
caregivers and colleagues from RehabCare to our team as we jointly
pursue the building of a great new company that is committed to
ensuring that our patients and residents continue to receive the
best care on their journey to recovery. We also have been fortunate
to add John Short and Chris Hjelm to our Board and look forward to
their contributions to our continued growth and success. Moreover,
the addition of Brock Hardaway, Pat Henry and Mary Pat Welc will
strengthen our management team and contribute to a smooth
operational transition.”
Forward-Looking Statements
This press release includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. All statements regarding Kindred’s expected
future financial position, results of operations, cash flows,
financing plans, business strategy, budgets, capital expenditures,
competitive positions, growth opportunities, plans and objectives
of management and statements containing the words such as
“anticipate,” “approximate,” “believe,” “plan,” “estimate,”
“expect,” “project,” “could,” “should,” “will,” “intend,” “may” and
other similar expressions, are forward-looking statements.
Such forward-looking statements are inherently uncertain, and
stockholders and other potential investors must recognize that
actual results may differ materially from Kindred’s expectations as
a result of a variety of factors, including, without limitation,
those discussed below. Such forward-looking statements are based
upon management’s current expectations and include known and
unknown risks, uncertainties and other factors, many of which
Kindred is unable to predict or control, that may cause Kindred’s
actual results or performance to differ materially from any future
results or performance expressed or implied by such forward-looking
statements. These statements involve risks, uncertainties and other
factors discussed below and detailed from time to time in Kindred’s
filings with the SEC.
In addition to the factors set forth above, other factors that
may affect Kindred’s plans or results include, without limitation,
(a) Kindred’s ability to integrate the operations of the acquired
hospitals and rehabilitation services operations and realize the
anticipated revenues, economies of scale, cost synergies and
productivity gains in connection with the RehabCare acquisition and
any other acquisitions that may be undertaken during 2011, as and
when planned, including the potential for unanticipated issues,
expenses and liabilities associated with those acquisitions and the
risk that RehabCare fails to meet its expected financial and
operating targets, (b) the potential for diversion of management
time and resources in seeking to integrate RehabCare’s operations,
(c) the potential failure to retain key employees of RehabCare, (d)
the impact of Kindred’s significantly increased levels of
indebtedness as a result of the RehabCare acquisition on Kindred’s
funding costs, operating flexibility and ability to fund ongoing
operations, development capital expenditures or other strategic
acquisitions with additional borrowings, particularly in light of
ongoing volatility in the credit and capital markets, (e) the
potential for dilution to Kindred’s stockholders as a result of the
RehabCare acquisition, (f) the impact of pending or future
litigation relating to the RehabCare acquisition, (g) the impact of
healthcare reform, which will initiate significant reforms to the
United States healthcare system, including potential material
changes to the delivery of healthcare services and the
reimbursement paid for such services by the government or other
third party payors. Healthcare reform will impact each of Kindred’s
businesses in some manner. Due to the substantial regulatory
changes that will need to be implemented by the Centers for
Medicare and Medicaid Services (“CMS”) and others, and the numerous
processes required to implement these reforms, Kindred cannot
predict which healthcare initiatives will be implemented at the
federal or state level, the timing of any such reforms, or the
effect such reforms or any other future legislation or regulation
will have on Kindred’s business, financial position, results of
operations and liquidity, (h) changes in the reimbursement rates or
the methods or timing of payment from third party payors, including
commercial payors and the Medicare and Medicaid programs, changes
arising from and related to the Medicare prospective payment system
for LTAC hospitals, including potential changes in the Medicare
payment rules, the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003, and changes in Medicare and Medicaid
reimbursements for nursing centers, and the expiration of the
Medicare Part B therapy cap exception process, (i) the impact of a
proposed rule issued by CMS on April 28, 2011 providing for a
potential 11.3% reduction in Medicare reimbursement to nursing
centers as well as proposed changes in payments for the provision
of group therapy, (j) the effects of additional legislative changes
and government regulations, interpretation of regulations and
changes in the nature and enforcement of regulations governing the
healthcare industry, (k) Kindred’s ability to successfully pursue
its development activities, including through acquisitions, and
successfully integrate new operations, including the realization of
anticipated revenues, economies of scale, cost savings and
productivity gains associated with such operations, (l) the impact
of the Medicare, Medicaid and SCHIP Extension Act of 2007 (the
“SCHIP Extension Act”), including the ability of Kindred’s
hospitals to adjust to potential LTAC certification, medical
necessity reviews and the moratorium on future hospital
development, (m) the impact of the expiration of several
moratoriums under the SCHIP Extension Act which could impact the
short stay rules, the budget neutrality adjustment as well as
implement the policy known as the “25 Percent Rule,” which
would limit certain patient admissions, (n) failure of Kindred’s
facilities to meet applicable licensure and certification
requirements, (o) the further consolidation and cost containment
efforts of managed care organizations and other third party payors,
(p) Kindred’s ability to meet its rental and debt service
obligations, (q) Kindred’s ability to operate pursuant to the terms
of its debt obligations, including Kindred’s obligations under
financings undertaken to complete the RehabCare acquisition, and
Kindred’s ability to operate pursuant to its master lease
agreements with Ventas, Inc. (NYSE:VTR), (r) the condition of the
financial markets, including volatility and weakness in the equity,
capital and credit markets, which could limit the availability and
terms of debt and equity financing sources to fund the requirements
of Kindred’s businesses, or which could negatively impact Kindred’s
investment portfolio, (s) national and regional economic,
financial, business and political conditions, including their
effect on the availability and cost of labor, credit, materials and
other services, (t) Kindred’s ability to control costs,
particularly labor and employee benefit costs, (u) increased
operating costs due to shortages in qualified nurses, therapists
and other healthcare personnel, (v) Kindred’s ability to attract
and retain key executives and other healthcare personnel, (w) the
increase in the costs of defending and insuring against alleged
professional liability and other claims and the ability to predict
the estimated costs related to such claims, including the impact of
differences in actuarial assumptions and estimates compared to
eventual outcomes, (x) Kindred’s ability to successfully reduce (by
divestiture of operations or otherwise) its exposure to
professional liability and other claims, (y) Kindred’s ability to
successfully dispose of unprofitable facilities, (z) events or
circumstances which could result in the impairment of an asset or
other charges, (aa) changes in generally accepted accounting
principles or practices, and changes in tax accounting or tax laws
(or authoritative interpretations relating to any of these
matters), and (ab) Kindred’s ability to maintain an effective
system of internal control over financial reporting. Many of these
factors are beyond Kindred’s control. Kindred cautions investors
that any forward-looking statements made by Kindred are not
guarantees of future performance. Kindred disclaims any obligation
to update any such factors or to announce publicly the results of
any revisions to any of the forward-looking statements to reflect
future events or developments.
About Kindred Healthcare
Kindred Healthcare, Inc., a top-150 private employer in the
United States, is a healthcare services company based in
Louisville, Kentucky with annual revenues of $6 billion and
approximately 76,000 employees in 46 states. On June 1, 2011,
Kindred through its subsidiaries provided healthcare services in
over 2,000 locations, including 121 long-term acute care hospitals,
224 nursing and rehabilitation centers, 118 inpatient
rehabilitation facilities (primarily hospital-based units) and a
contract rehabilitation services business, RehabCare, which served
approximately 1,560 non-affiliated facilities. Ranked as one of
Fortune magazine’s Most Admired Healthcare Companies for three
years in a row, Kindred’s mission is to promote healing, provide
hope, preserve dignity and produce value for each patient,
resident, family member, customer, employee and shareholder we
serve. For more information, go to www.kindredhealthcare.com.
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