Bank Of America Sees Value In A Humana-Kindred Healthcare Deal

The health care sector could see another notable merger, as insurer Humana Inc HUM is reportedly in talks to acquire the acute care provider Kindred Healthcare, Inc. KND.

The Analyst

Bank of America Merrill Lynch's Kevin Fischbeck is no longer rating Kindred Healthcare's stock, as the analyst said shares are no longer based on fundamentals amid M&A reports.

The Thesis

According to media reports, Humana would team up with private equity firms Welsh, Carson, Anderson & Stowe and TPG to acquire Kindred Healthcare for $9 per share, which implies an 8x multiple on 2018E EBITDAR, Fischbeck said in a research report. (See the analyst's track record here.) 

As part of a deal, the private equity firms would acquire Kindred Healthcare's long-term care hospitals and inpatient rehabilitation facilities. Separately, Humana and a private equity firm would assume the home health and hospice operations.

Kindred Healthcare is the largest company in the home health industry and second largest in the hospice industry, both of which are highly fragmented, Fischbeck said.

"We think the potential deal as reported could have strategic merits as [Humana] seeks to engage members, transition them to low-cost settings of care and ultimately control trend," the analyst said. 

A $9-per-share offer represents only a 5-percent premium to Kindred Healthcare's closing price on Friday, but implies a "significantly higher" premium to the $6 range shares were trading at ahead of its third quarter earnings report, according to BofA. 

Price Action

Shares of Kindred Healthcare were trading higher by more than 6 percent Monday morning at $9.05.

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