Kindred Healthcare to acquire RehabCare; $1.85 billion of long-term financing expected at closing

By Jennifer Lanning Drey and Sara Rosenberg

Savannah, Ga., and New York, Feb. 8 - Kindred Healthcare Inc. has obtained a financing commitment in connection with its planned acquisition of RehabCare Group, Inc., Paul Diaz, Kindred's chief executive officer, said during a Tuesday conference call held to discuss the transaction.

The $1.85 billion financing includes a $600 million senior secured five-year asset-based revolving credit facility, a $700 million seven-year senior secured term loan and plans for a $550 million senior unsecured notes offering that is backed by a commitment for a $550 million 12-month bridge loan, according to a 425 filed with the Securities and Exchange Commission.

The term loan and asset-based revolver share a $150 million accordion feature.

Covenants under the term loan include a maximum total adjusted leverage ratio, a minimum fixed charge coverage ratio and maximum capital expenditures, while revolver covenants include a minimum fixed charge coverage ratio and maximum capital expenditures.

JPMorgan, Morgan Stanley and Citigroup are the lead banks on the financing.

The company expects to have $1.6 billion drawn at the closing of the transaction.

The undrawn portion represents the bank revolving credit line, which will be collateralized primarily around accounts receivable, Richard Lechleiter, Kindred's chief financial officer, said later in the call.

He also noted that the company believes the revolver will provide adequate liquidity for it to continue with its core cluster development strategy, as well as help in the integration of the two companies.

At the same time, Diaz said Kindred believes it will be able to quickly delever following the close of the transaction. The adjusted leverage of the combined company is projected to be about 4.5 times at the end of 2011, roughly the same as Kindred's stand-alone adjusted leverage at the close of 2010, he said.

"We certainly hope that we'll be able to substantially reduce the leverage over the next 12 to 24 months, and we've got a tremendous amount of operating cash flow that's being generated," Diaz said when asked about the company's targets for reducing leverage.

The CEO noted that in recent years Kindred has been using much of its operating cash flow for organic development and will continue to pursue those opportunities. However, the company will look at deleveraging first, particularly in 2011.

"A significant amount of the debt structure will be in the form of prepayable debt, both in terms of the bank revolver itself, and there will be another senior facility backed primarily by owned real estate," Lechleiter later added.

Under the terms of the agreement, each stockholder of RehabCare common stock will receive $26.00 per share in cash and 0.471 of a share of Kindred common stock. The equity for the transaction is around $228 million.

The transaction is valued at $1.3 billion, including $400 million of existing debt.

The use of proceeds from the debt and equity will be divided as follows: $885 million to purchase RehabCare equity, $399 million to retire RehabCare debt, $367 million to retire Kindred debt and $179 million for other costs, according to the slides accompanying the presentation.

$6 billion annual revenues

Kindred's combination with RehabCare, a St. Louis-based provider of physical rehabilitation services, would create the largest post-acute health-care services company in the United States with more than $6 billion in annual revenues and operations in 46 states, Diaz said.

Kindred expects the combined company to achieve operating synergies of $40 million within a period of two years following closing, with $25 million expected in the first year after closing.

"We are particularly excited about the opportunity to add rehab care services in our cluster markets and in-patient services to our service offerings," Diaz said.

Based on pro forma financial projections, revenues for the combined company are expected to be $6.2 billion for the year ended Dec. 31, 2011. Pro forma EBITDA of the combined company is expected to range from $470 million to $487 million, Diaz said.

Closing on the acquisition is expected on or about June 30, subject to approvals by the stockholders of both companies, completion of financing, clearance under the provisions of the Hart-Scott-Rodino Act of 1976, and the receipt of certain licensure and regulatory approvals.

Kindred Healthcare is a Louisville, Ky.-based health-care services company.

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