Kindred Healthcare Buying RehabCare For $900M

NEW YORK (AP) - Kindred Healthcare's $900 million agreement to buy rival RehabCare Group would expand its rehabilitation service business and keep patients under its care throughout their recovery.

Both companies operate long-term acute care hospitals and inpatient rehabilitation facilities. Kindred is the larger of the two companies, but RehabCare has a larger contract business to provide rehabilitation services at hospitals and nursing and assisted living facilities it doesn't own.

The combined company will have 118 long term acute care hospitals, 226 nursing and rehabilitation centers, and 121 inpatient rehabilitation facilities, and 1,808 rehabilitation service contracts. It will do business in 46 states.

In addition to the $900 million in cash and stock that Kindred would pay for RehabCare under the deal announced Tuesday, it will assume $400 million in debt.

Kindred President and CEO Paul Diaz said the combined company will have the chance to boost its revenue by moving patients from one facility to another, such as from a long-term hospital to a nursing facility, as their recovery continues.

In an interview, Jefferies & Co. analyst Arthur Henderson said the 2010 health care reform law may have encouraged Kindred and RehabCare to team up. Health care companies are looking for ways to become more efficient and reduce their costs because the law cuts funding for Medicare, Henderson said, and the combination could help Kindred do that. He said Kindred wants hospitals and health insurers to see it as a "one-stop shop" where a patient can move from a hospital to a longer-term facility for further care or for rehabilitation.

Henderson added the deal will help Kindred convince commercial health insurers to include it in their networks. It also takes the company into new markets. Kindred has focused on specific "cluster" markets where demographics are favorable to its business, such as New York, Los Angeles, San Diego and Chicago. The company says Philadelphia, Pittsburgh, St. Louis and Kansas City could be new clusters. The deal also gives Kindred more than a dozen additional hospitals in Texas.

The boards of both companies approved the deal. It also requires approval by shareholders of the two companies and regulatory clearance. The companies expect the sale to close around June 30.

Kindred said it expects $25 million in savings in the first year after the deal closes, and $40 million within two years. The companies said two members of RehabCare's board of directors will join the Kindred board after the deal closes.

Kindred Healthcare Inc., based in Louisville, Ky., agreed to pay about $35 per share for St. Louis-based RehabCare Group Inc., a 37.4 percent premium over Monday's closing price of $25.47. It will pay $26 in cash and 0.471 Kindred shares for each RehabCare share. Shares of RehabCare have traded between $15.88 and $31.93 over the last year.

Kindred will issue 12 million new shares of its stock as part of the deal.

Shares of both companies surged in afternoon trading. RehabCare shares climbed $10.84, or 42.5 percent, to $36.30. Shares of Kindred gained $3.87, or 19.9 percent, to $23.35. Earlier Kindred's shares set an annual high of $25.48.

Both companies reported their fourth-quarter results on Tuesday.

Kindred said its net income grew 6 percent to $20.4 million, or 52 cents per share. Its revenue increased 6 percent to $1.14 billion, as hospital revenue rose 5 percent, nursing and rehabilitation center revenue rose 4 percent, and revenue from the Peoplefirst rehabilitation staffing and management business climbed 21 percent. Its results surpassed Wall Street's expectations

RehabCare said its net income rose 9 percent to $17.1 million, or 69 cents per share. Its revenue edged up 1 percent to $339.3 million. The company said its skilled nursing service business was hurt by regulatory changes, but results from the hospital business were strong.

Kindred reported $4.36 billion in revenue in 2010, compared to $1.33 billion for RehabCare, and Kindred expects the deal to add to its profit immediately.

If the companies had combined Jan. 1, they said their total 2011 profit would be about $1.95 to $2.15 per share, with revenue of about $6.2 billion.