What Gentiva’s Expanded Hospice Presence Means for the M&A Mix

Gentiva’s recent $710 million acquisition of ProMedica’s hospice and home-based care assets bucks prevailing trends in today’s M&A market.

Transaction volume dipped during 2022, specifically when it came to large platform deals by private equity firms. Many in the space expect smaller deals to become more prevalent during the first half of 2023, particularly in light of rising interest rates and other economic forces.

“Given the fragmentation in the market, this type of large transaction is more of an outlier. It’s a little unique in that most of the activity in the hospice and home care markets is more in the mid-market space and not large platform-type transactions,” Les Levinson, partner in health law at the New York-based M&A advisory firm Robinson+Cole LLP, told Hospice News. “But I do think we can expect to see more of these larger deals as we get deeper into 2023 and more assets come to market. We’ll have more realignment of expectations in terms of valuation.”

An emerging powerhouse expands

Atlanta-based hospice provider Gentiva earlier this week agreed to acquire Heartland Hospice from ProMedica, a nonprofit health system headquartered in Ohio. The organization includes a network of 13 hospitals, 2,600 physicians, a health plan, 400 skilled nursing and rehabilitation centers, memory care communities and outpatient rehabilitation clinics.

Gentiva financed the transaction with committed debt from Goldman Sachs Group Inc. (NYSE: GS), a representative for Gentiva told Hospice News’ sister publication Skilled Nursing News.

The deal marks Gentiva’s first purchase since the company emerged from Humana, Inc.’s (NYSE: HUM) $2.8 billion divestiture of Kindred at Home’s hospice and personal care segments. The insurance mammoth sold a 60% stake to the private equity firm Clayton, Dubilier & Rice (CDR) last year.

CDR is in the process of rebranding Kindred’s hospice locations as Gentiva. As of 2020, Kindred at Home was the second-largest hospice provider in the United States by market share at 4.6%, according to LexisNexis.

The transaction widens Gentiva’s footprint to more than 500 locations, up from 380 previously, CEO David Causby told Bloomberg. It also brings an additional 10,000 patients under its wings and adds roughly 4,000 employees to its ranks, Causby indicated.

ProMedica tightens its belt

The deal follows several years of financial losses for ProMedica. The organization finished 2021 in the red by $1.5 million, according to an independent audit by the accounting firm Plante & Moran. This follows a nearly $115 million shortfall the prior year, tax documents show.

To make up the difference, the nonprofit health system has been selling off assets. Prior to the Gentiva deal, ProMedica pulled out of a joint venture with Welltower (NYSE: WELL), transferring total ownership of 147 skilled nursing facilities to its former partner.

“By engaging in this transaction, we will be able to increase focus and resources on the other areas of our health system as we continue to provide high-quality, compassionate care and invest in our communities and dedicated caregivers,” Arturo Polizzi, president and CEO of ProMedica, said in a statement.

Subsequently, Welltower began transitioning those assets to a separate joint venture with Integra Health.

Financial pressures have driven some nonprofits to the seller’s table to ensure that the communities they serve have sustainable access to care, Levinson said.

“It’s this notion of wanting to improve finances and refocus core operations to align with their mission – which is not an unusual strategy for nonprofits,” Levinson told Hospice News. “We’ve handled a number of transactions on a very similar basis where a not-for-profit spun off its hospice and home care assets to other providers — particularly for-profit providers. From my understanding, it’s often focused on having more resources to execute their care strategies.”

The deal may signal a forthcoming rise in spin-offs or carve-outs in the space as companies sell business segments to capitalize on valuations or just to stay afloat, Levinson projected. Examples include not only this transaction, but Humana’s Kindred sale that spawned Gentiva itself.

Likewise, Encompass Health (NYSE: EHC) last summer spinned off its home health and hospice segment as Enhabit, Inc. (NYSE: EHAB).

“Corporate carve-outs are likely to be central to health care dealmaking this year,” Axios Editor Claire Rychlewski recently wrote regarding the Gentiva transactions. 

2023 outlook still focused on smaller deals

As Levinison pointed out, trends among private equity and strategic buyers suggest that Gentiva’s ProMedica deal will likely be an “outlier” among home health and hospice transactions.

Case in point, Addus Homecare (NASDAQ: ADUS) CEO Dirk Allison has indicated that the company will be zeroing in on smaller acquisition targets in the first half of the year, though the company may pick up larger assets in subsequent quarters.The company’s M&A strategy currently leans more towards home health and personal care, but hospice is still a part of that mix, he indicated.

Smaller tuck-ins will also be a key focus for Walgreens-Boots Alliance (NASDAQ: WBA) as it shifts away from the multi-billion dollar deals the company has previously sought out.

“We’re more likely to buy smaller companies with specific color capabilities that we need to advance our organic business,” CFO John Kehoe recently stated in an earnings call.

But this could change later in the year as private equity firms see more of their hospice assets mature amid tightening government oversight, according to Levinson.

“Some of the private-equity owned or sponsored hospice platforms may be maturing from a holding period. In other words, it’s been five, six or seven years since purchasing and it’s time to exit and monetize the investment made,” Levinson told Hospice News. “That’s not going to be a surprise if we see these start to pop up in the latter part of the year. But when you take that into account with scrutiny in the hospice regulatory environment perhaps adding challenges, it creates a little bellwether for some of those larger platforms to say, ‘Let’s take our profits while we can before things potentially get even more challenging.’”