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Recently, a leading health and hospice provider, Gentiva Health Services Inc. (GTIV - Analyst Report) entered into a merger agreement with a complementary company Harden Healthcare Holdings Inc. pursuant to which it will acquire the latter for approximately $409 million. The deal is expected to culminate in the fourth quarter of 2013 and is pending customary closing conditions.

Of the purchase consideration, $355 million will be paid in cash and the remaining $53.8 million in Gentiva common stock. The cash transaction will be funded by available cash and a new credit facility. Additionally Gentiva expects to issue a new $855 million term loan facility to finance the remainder of the transaction and also to refinance the company’s existing term loans.

On closing, Gentiva will acquire the home, health, hospice and community care business of Harden while the latter’s long-term care business will be retained by its existing shareholders. Gentiva will become a preferred provider for the 49 skilled nursing and assisted living facilities of Harden in Texas. Additionally, Harden employees will be joining Gentiva. The merger of the two companies is expected to create an entity with home health contributing 49% of total revenues, hospice contributing 41% and community care 10%.

The acquisition is expected to shore up the long-term growth of Gentiva. Within one year of closing the deal is expected to bolster Gentiva’s adjusted income per share. Adjusted EBITDA is expected to escalate to a range of $210 million to $220 million, excluding the impact of equity based compensation expense. Also, on culmination of the event at the stipulated time, 2014 revenues will likely go up to a range of $2.1 billion to $2.2 billion.  It is also expected to enhance the Medicare exposure of Gentiva.

The healthcare industry provides ample growth opportunities at present owing to the increasing healthcare needs of the aging population and the existing rate pressures. Harden being a leading post-acute care provider is expected to help Gentiva to prosper in this field and position itself as a leader in this regard. Also it is expected to broaden Gentiva’s portfolio by allowing it to offer its services to the dual eligibles, one of the frailest populations of the U.S. and also a priority for the U.S. government.

Acquiring a complementary company is always beneficial as it endows the acquirer with the opportunity to curb competition to some extent as well as gain on the acquired company’s resources. Harden operates in 13 states and boasts a considerable customer base. Thus we expect the strategic acquisition to help Gentiva meet this objective apart from enhancing the company financials.  

Gentiva currently carries a Zacks Rank #3 (Hold). Among other health service providers, Amsurg Corp. (AMSG - Analyst Report) and LCA-Vision Inc. (LCAV - Snapshot Report) carry a Zacks Rank #2 (Buy) while Addus HomeCare Corporation (ADUS - Snapshot Report) carries a favorable Zacks Rank #1 (Strong Buy).

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