Humana-Kindred Deal Keeps Shakeout Alive In Healthcare Space

Health insurer Humana Inc. (NYSE:HUM) has signed an agreement to acquire Kindred-at-Home, a unit of Kindred Healthcare Inc.

Details of the Deal

TPG Capital and Welsh, Carson, Anderson & Stowe and Humana have formed a joint venture to buy Kindred for nearly $4.1 billion including the acquired company’s debt. Humana will occupy a 40% stake for $800 million in Kindred-at-Home, which will be separated from the rest of the company after the deal. The transaction will see light by the summer of 2018 and will be slightly accretive to the company’s earnings per share in 2019 and beyond.

Essence of the Deal for Humana

The deal will provide a vertical integration for Humana and aligns with the company’s strategy to grow in the home healthcare arena. The deal will allow the company to provide an improved care to patients at low cost.

This transaction will provide Humana with an extensive geographic coverage with approximately 65% overlap with Humana’s individual Medicare Advantage membership. The company will also have full access to extensive clinical capabilities to better serve its members.

A deal of this kind comes as no surprise to us given that the company had kept its eyes wide open for such attractive acquisitions after its failed merger with Aetna Inc. (NYSE:AET) earlier in the year. The company’s balance sheet with strong financial flexibility also provides enough support for capital deployment activities.

Last week, the company’s board of directors approved a new share repurchase program to buy back its common stock worth up to $3 billion.

Share Price Performance

Year to date, the stock has rallied 21%, significantly underperforming the industry’s growth of 43%. Nonetheless, the recent announcement, a well-poised Medicare business as its solid balance sheet should drive the shares higher.

Industry Trend

A spate of similar deals is witnessed in the industry of late, driven by the increasing trend of health insurers foraying into patient-care business. The mega merger of CVS Health Corp. (NYSE:CVS) with Aetna aims to dispense affordable cure to patients at their convenience closer home or at an outpatient location.

Further competition is lent by UnitedHealth Group Inc. (NYSE:UNH) , which is voraciously spreading its business in this space via its OptumCare unit by acquiring doctor clinics, urgent care facilities and surgery centers. Recently, UnitedHealth Group’s Optum unit announced that it would pay nearly $5 billion to buy DaVita Healthcare Partners Inc.’s (NYSE:DVA) Medical Group along with its clinics and urgent care centers.

The central tenet for all these deals is to cut costs and improve care. These developments mark the coming forward of health insurers to play a more direct role in providing actual medical services and move beyond offering insurance.

These deals seeking to reduce hospitalizations, lower emergency room visits and allowing physicians and clinicians to extend their care all the way to a patient’s home are, however, detrimental to hospital companies’ business and survival.

Going Forward

The ripple of shakeup in the health care industry started by CVS-Aetna deal continues to trend higher. One after another player continues to join the bandwagon of consolidation. Given the urgent need (in the rapidly-transforming health care industry) for increase in heft and size, restraint of sky-high medical costs plus diversification of business, we won’t be surprised if we hear more of deals along similar lines going forward.

Humana carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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