Gentiva Health Services Inc. agreed to acquire Odyssey HealthCare Inc. for about $1 billion, a combination that will create the largest U.S. home-health and hospice provider.
Gentiva has agreed to pay $27 a share for Odyssey, a 40% premium to Friday's closing price. Odyssey's stock has doubled the past year and was last above $27 six years ago.
Gentiva made its final offer on Friday and signed the deal at 4 a.m. EDT Monday, Gentiva Chief Executive and President Tony Strange said on a conference call.
In early afternoon trading, Odyssey shares surged $7.28, or 37.7%, to $26.56, while Gentiva shares rose 14.2%, or $3.65, to $29.44. Another home-health provider, Almost Family Inc., saw shares rise 4.6%, or $1.60, to $36.66.
Jefferies & Co. analyst Arthur Henderson called Gentiva's acquisition of Odyssey "a strategically sound move that will not only drive incremental growth for the company, but will also allow it to diversify its business while generating operations synergies."
Industry insiders for years have debated the merits of melding home nursing and hospice, with Gentiva a long-time proponent based on its view that the businesses can share referral sources, marketing staff and recruitment resources, Mr. Henderson said.
While not surprised that Gentiva is making a big push into the hospice business, especially after the company recently divested noncore businesses, Mr. Henderson was "taken aback by the magnitude of their first big deal in the hospice space. That said, we view this deal as an indication of management's renewed vigor in driving accelerated growth through an aggressive acquisition strategy."
Given the interest in hospice, and a newly enacted health-care overhaul that may make it harder for mom-and-pop home-nursing companies to do business, Mr. Henderson expects to see more deals involving home-nursing and hospice players. Hospice presents a value to home-nursing businesses long-term, he said.
"I do think we're in a new wave of consolidation that's going to play out fairly actively ... over the next several years," he said. Mr. Henderson said home-nursing patients may be likely to use the same company for hospice later if they were pleased with their care. "There's a nice fit there," he said.
He said that, conservatively, the Odyssey acquisition should add at least 20 cents to Gentiva's fiscal 2011 earnings per share. While the transaction will boost the company's debt, strong free cash flow should enable it to quickly reduce debt while continuing to make smaller home-nursing acquisitions, he said.
The deal values Odyssey at nearly 16.3 times analysts' average 2011 EPS estimate as generated by Thomson Financial.
"While the multiples are reasonable, given other transactions in health-care services, we continue to believe that expectations of ODSY's near-term results are very conservative," Susquehanna Financial Group analyst A.J. Rice said. He noted that the transaction places Odyssey at about 15.7 times his 2011 EPS estimate and, on an enterprise value to earnings-before-interest-taxes-depreciation-and-amortization basis, at 9.5 times his 2011 Ebitda view.
"We had believed for some time that [Odyssey] was a potential take-out candidate. Leading players in home health, skilled nursing and other alternate site areas have expressed an interest in growing their presence in the hospice sector," Mr. Rice said, noting that Odyssey is the only pure-play hospice operator, making it an attractive target.
