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EX-2.1 - EX-2.1 - REHABCARE GROUP INC | c64654exv2w1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event
reported): May 12, 2011
reported): May 12, 2011
RehabCare Group, Inc.
(Exact Name of Registrant as Specified in Charter)
Delaware | 001-14655 | 51-0265872 | ||
(State or Other | (Commission | (I.R.S. Employer | ||
Jurisdiction of Incorporation) | File Number) | Identification Number) |
7733 Forsyth Boulevard | ||
Suite 2300 | ||
St. Louis, Missouri | 63105 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code:
(800) 677-1238
Not applicable
(Former name or former address if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the
filing obligation of the registrant under any of the following provisions (see General Instruction
A.2. below):
þ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR 240.13e-4(c))
Item 1.01. Entry into a Material Definitive Agreement.
Amendment of Merger Agreement
The description of the amendment, dated May 12, 2011 to the merger agreement, dated as of
February 7, 2011, among Kindred Healthcare, Inc. (Kindred), Kindred Healthcare Development, Inc.
and RehabCare Group, Inc. (RehabCare), contained in item 8.01 below and Exhibit 2.1 to this Form
8-K are incorporated herein by reference.
Item 8.01. Other Events.
Settlement of Certain Litigation
As previously disclosed at pages 84-85 of the joint proxy statement/prospectus dated April 26,
2011 under the heading The MergerLitigation Related to the Merger, RehabCare, the members of
RehabCares board of directors and Kindred have been named as defendants in certain actions filed
on behalf of RehabCare stockholders challenging the proposed merger of Kindred and RehabCare. As
disclosed in the joint proxy statement/prospectus, on February 15, 2011, the Norfolk County
Retirement System, a purported stockholder of RehabCare, filed a purported class action lawsuit in
the Delaware Court of Chancery (the Court of Chancery) against RehabCare, RehabCares directors
and Kindred (the Norfolk County litigation); on February 28, 2011, City of Pontiac General
Employees Retirement System, a purported stockholder of RehabCare, filed a purported class action
lawsuit in the Court of Chancery against RehabCare, RehabCares directors and Kindred (the City of
Pontiac litigation); and on March 4, 2011, Plumbers & Pipefitters National Pension Fund, a
purported stockholder of RehabCare, filed a purported class action lawsuit in the Court of Chancery
against RehabCare, RehabCares directors and Kindred (the Plumbers & Pipefitters litigation and,
together with the Norfolk County litigation and the City of Pontiac litigation, the Delaware
litigation).
As also disclosed in the joint proxy statement/prospectus, on March 9, 2011, the Court of
Chancery consolidated the Delaware litigation under the caption In re RehabCare Group, Inc.
Shareholders Litigation and plaintiffs filed a verified consolidated class action complaint on
April 5, 2011. Defendants commenced document production on March 30, 2011 and substantially
completed it by April 22, 2011. Depositions took place between April 28, 2011 and May 11, 2011.
On May 12, 2011, the defendants entered into a memorandum of understanding with the plaintiffs
in the Delaware litigation regarding the settlement of the Delaware litigation. In connection with
the settlement contemplated by the memorandum of understanding, (i) Kindred and RehabCare agreed to
make certain additional disclosures related to the proposed merger, which are contained in this
Form 8-K, (ii) RehabCare agreed to make the payment, at and subject to the closing of the merger
between Kindred and RehabCare, of $2,500,000.00 (two million five hundred thousand dollars) in cash
into a settlement pool for the benefit of the plaintiff class in In re RehabCare Group, Inc.
Shareholders Litigation, to be distributed after final approval of the settlement of the Delaware
Litigation and (iii) Kindred, Kindred Healthcare Development, Inc. and RehabCare agreed to enter
into the amendment, dated May 12, 2011, to the merger agreement, dated as of February 7, 2011,
among Kindred, Kindred Healthcare Development, Inc. and RehabCare, the material terms of which are
as follows:
| Inclusion of an acknowledgement by Kindred and RehabCare of the waiver of any existing standstill undertakings for the benefit of RehabCare; |
| Change of the definition of Company Termination Fee to mean an amount equal to $13,000,000.00 (thirteen million dollars); and | ||
| Modification of the agreement to eliminate the requirement for a three-business day period during which Kindred has the right to match a superior proposal |
A copy of the amendment is included as Exhibit 2.1 to this Form 8-K and the description of
this amendment is qualified by this exhibit which is incorporated herein by reference.
The memorandum of understanding contemplates that the parties will enter into a stipulation of
settlement. The stipulation of settlement will be subject to customary conditions, including court
approval following notice to RehabCares stockholders. In the event that the parties enter into a
stipulation of settlement, a hearing will be scheduled at which the Court of Chancery will consider
the fairness, reasonableness, and adequacy of the settlement. If the settlement is finally approved
by the court, it will resolve and release all claims in all actions that were or could have been
brought challenging any aspect of the proposed merger, the merger agreement, and any disclosure
made in connection therewith, pursuant to terms that will be disclosed to stockholders prior to
final approval of the settlement. In addition, in connection with the settlement, the parties
contemplate that plaintiffs counsel in the Delaware litigation will file petitions for the award
of attorneys fees and expenses to be paid by RehabCare and/or its successor(s) in interest.
RehabCare (and/or its successor(s) in interest) shall pay or cause to be paid such award(s) of
attorneys fees and expenses. There can be no assurance that the parties will ultimately enter into
a stipulation of settlement or that the Court of Chancery will approve the settlement even if the
parties were to enter into such stipulation. In such event, the proposed settlement as contemplated
by the memorandum of understanding may be terminated.
SUPPLEMENT
TO JOINT PROXY STATEMENT/PROSPECTUS
In connection with the pending transaction between Kindred and RehabCare, Kindred has filed with
the Securities and Exchange Commission a Registration Statement on Form S-4 (commission file number
333-173050) that includes a joint proxy statement of Kindred and RehabCare that also constitutes a
prospectus of Kindred. Set forth below are revised, supplemental versions of the sections that
appear under the headings Background of the Merger, Opinion of RehabCares Financial Advisor
CGMI and Opinion of RehabCares Financial Advisor RBC in the joint proxy statement/prospectus
included in such Registration Statement:
The Merger Background of the Merger
As part of its continuing evaluation of strategic alternatives, the RehabCare board of
directors and management regularly evaluate RehabCares business strategy and prospects for growth
and consider opportunities to improve RehabCares operations and financial performance in order to
create value for RehabCare stockholders. As part of this process, the RehabCare board of directors,
in consultation with RehabCares management and outside legal and financial advisors, evaluates and
pursues a number of opportunities to expand and diversify RehabCares business.
In late 2007 through early 2008, senior management of RehabCare and Kindred engaged in
preliminary discussions regarding a possible acquisition of RehabCare by Kindred but were unable to
reach agreement. The lead of the CGMI team advising RehabCare in connection with the current transaction
advised Kindred in connection with these preliminary discussions in 2007 and 2008, while employed
by another investment advisory firm. The parties considered the complementary aspects of their
businesses and the potential benefits that a strategic business combination of RehabCare and
Kindred could provide, including cost and revenue related synergies and the related potential
benefits to stockholders, employees, patients and other important constituents of both companies.
Kindred submitted a preliminary indication of interest to acquire RehabCare at a price of $25.00
per share, with half payable in cash and the other half in Kindred common stock. Following such
indication, the parties were unable to agree on a mutually acceptable valuation for RehabCare, and
those discussions were discontinued.
During the spring and summer of 2010, RehabCares stock price dropped significantly, which
management believed was caused by the general uncertainty surrounding healthcare reform.
RehabCares board of directors and management believed that the uncertainties that RehabCare was
facing could limit its ability to grow, including by limiting its ability to finance large
transactions which otherwise might be desirable for RehabCares growth. Consequently, as part of
its normal evaluation of strategic alternatives, the RehabCare board of directors requested that
CGMI attend the regularly scheduled meeting of the RehabCare board of directors on August 2 and
August 3, 2010 to discuss potential strategic alternatives for RehabCare.
The RehabCare board of directors held a regularly scheduled meeting on August 2 and August 3,
2010 and a special meeting on August 18, 2010. As part of those meetings, CGMI provided a general
overview of various strategic alternatives, including analyzing various standalone alternatives,
potential acquisition targets, and potential financial and strategic partners. The RehabCare board
of directors discussed with management and CGMI the risks and benefits of pursuing those strategic
alternatives, including the execution risks associated with pursuing the standalone alternatives
and potential acquisitions, and the confidentiality risks associated with commencing a process to
gauge interest in the acquisition of RehabCare. The RehabCare board of directors reviewed several
healthcare companies and financial sponsors to determine if any of them would be likely partners
for a business combination. With input from CGMI and RehabCare management, the RehabCare board of
directors concluded that, other than Kindred, there were no logical strategic acquirors of
RehabCare at that time. In reaching such conclusion, the RehabCare board of directors, with input
from CGMI and RehabCare management, discussed four other logical potential strategic acquirors of
RehabCare and the various reasons that each such third party would not be a likely acquiror, which,
included, among others, public statements, prior business contacts, leverage constraints, recent
significant acquisitions, and various regulatory and legal matters with respect to such third
parties. While the RehabCare board of directors believed that Kindred could be a potential
strategic acquiror, the board was skeptical of Kindreds ability and willingness to complete an
acquisition of RehabCare at an acceptable price, based in large part on the parties prior
discussions with respect to a potential transaction. At the conclusion of the August 18, 2010
meeting, the RehabCare board of directors engaged CGMI to contact certain financial sponsors to
determine interest in a potential acquisition of RehabCare. Based on the RehabCare board of
directors analysis, after consultation with RehabCare management and CGMI, of the potential
strategic partners and their respective ability and anticipated
interest in pursuing a strategic combination, as well as concerns regarding sharing sensitive
information with competitors, CGMI was directed by the RehabCare board of directors not to contact
potential strategic acquirors at such time.
On September 27, 2010, RehabCare entered into a formal engagement letter with CGMI to serve as
its financial advisor in connection with a possible strategic transaction, which provided, among
other things, that the Company will not unreasonably withhold a waiver of any potential conflict
of interest that may arise with respect thereto following receipt of notice and disclosure of such
conflict of interest by Citi. The Company hereby consents to participation by Citi or any of its
affiliates in providing or arranging, or seeking to provide or arrange, such financing, it being
understood that Citi will maintain proper information barriers and other procedures in accordance
with firm policies and practices to avoid unauthorized disclosure of confidential information
regarding the Company to any potential bidder..
As directed by the RehabCare board of directors, beginning on October 1, 2010, CGMI contacted
nine financial sponsors to evaluate potential interest in the acquisition of RehabCare. These
financial sponsors were selected based on their experience in the healthcare industry and their
ability to finance a transaction of this size. Eight of the nine financial sponsors contacted by
CGMI executed confidentiality agreements with RehabCare, and CGMI, as directed by the RehabCare
board of directors, thereafter delivered additional information regarding RehabCare to those
parties, including RehabCare managements financial model, a business overview and a preliminary
financing analysis performed by CGMI. Management presentations were made to five of those financial
sponsors, including Party A and Party B. The eight financial sponsors entered into standstill
agreements, which by their terms, prohibited, among other things, an unsolicited offer for
RehabCare.
Throughout 2010, as part of CGMIs regular client coverage of Kindred, CGMI regularly
communicated and met with Kindred senior management to discuss various potential transactions and
various potential acquisition candidates, including RehabCare. As part of these conversations, CGMI
or its affiliates discussed providing acquisition financing to Kindred.
On October 7, 2010, Paul Diaz, Kindreds President and Chief Executive Officer, met with
representatives of CGMI, as part of this regular client coverage, to review an analysis of
potential targets, including RehabCare and other potential targets, for Kindreds consideration of
possible strategic alternatives. Mr. Diaz subsequently asked CGMI to prepare an analysis of a
possible combination of Kindred and RehabCare for consideration by the Kindred board of directors.
CGMI asked for RehabCares permission to prepare such analysis, noting that Kindred had actively
considered the combination of RehabCare and Kindred as a strategic alternative for several years.
After receiving permission from Dr. John Short, President and Chief Executive Officer of RehabCare
and a member of RehabCares board of directors, CGMI prepared an analysis based on publicly
available information with respect to RehabCare, including an accretion/dilution analysis of a
possible combination at purchase prices ranging from $30.00 to $35.00 per share of RehabCare common
stock. Mr. Diaz included this analysis in written materials provided to the Kindred board of
directors, which discussed a possible combination with RehabCare at its regularly scheduled October
27 and 28, 2010 meeting, which CGMI did not attend. During this period, CGMI also indicated to Mr.
Diaz that it had been engaged by the RehabCare board of directors to advise it in connection with
strategic alternatives.
On October 28, 2010, Mr. Diaz contacted CGMI to express the Kindred board of directors
interest in exploring a combination with RehabCare and to inquire about appropriate next steps.
CGMI reminded Mr. Diaz that it would not be able to represent Kindred in connection with a possible
transaction with RehabCare, but that it would inform RehabCare of Kindreds interest. Following
discussions with Dr. Short, CGMI indicated to Mr. Diaz that he should contact Dr. Short directly to
communicate Kindreds desire to explore a potential transaction.
On October 29, 2010, Party A submitted a preliminary indication of interest to acquire
RehabCare at a price ranging from $25.00 to $27.00 per share. On November 1, 2010, Party B
submitted its preliminary indication of interest to acquire RehabCare at a price ranging from
$27.00 to $30.00 per share. The other seven financial sponsors did not submit indications of
interest and withdrew from the process.
On November 2, 2010, the RehabCare board of directors held a regularly scheduled meeting. At
this meeting, CGMI updated the RehabCare board of directors on the status of the process with the
financial sponsors, including the details of the indications of interest delivered by Party A and
Party B. CGMI also discussed its contact with
Mr. Diaz and Kindreds interest in pursuing a possible combination, and provided the RehabCare
board of directors with preliminary pro forma financial analysis of the two companies on a combined
basis, using publicly available information with respect to Kindred. The RehabCare board of
directors discussed in detail the proposals received from Party A and Party B. Based in part on the
input of management and CGMI, the RehabCare board of directors determined that these proposals did
not provide adequate value to the RehabCare stockholders and would not be pursued further at such
time, and that Party A and Party B were unlikely to make offers that the RehabCare board of
directors would ultimately find acceptable. The RehabCare board of directors further discussed the
contact from Kindred and the advantages and disadvantages of pursuing a transaction with Kindred.
The RehabCare board of directors engaged in a preliminary discussion of the benefits of a
transaction with Kindred, including the potential that such a combination would present compelling
synergies, but also considered the parties prior failed discussions. The RehabCare board of
directors also discussed various other strategic alternatives, including the potential benefits and
the execution risks of continuing as a stand alone entity and implementing its current strategic
plans. The RehabCare board of directors tabled further discussion of pursuing a transaction with
Kindred pending further contact from Kindred.
On November 4, 2010, Mr. Diaz called Dr. Short to inform him of Kindreds renewed interest in
acquiring RehabCare. Mr. Diaz verbally expressed to Dr. Short that Kindred would be interested in
pursuing an all cash acquisition of RehabCare, at a price ranging from $32.00 to $34.00 per share.
The RehabCare board of directors was informed of the verbal expression of interest made by
Kindred during a special meeting held on November 13, 2010. After consideration of Kindreds
proposal, the RehabCare board of directors determined to engage in further discussions with Kindred
to explore a potential transaction, established a special committee of the RehabCare board of
directors (whom we refer to as the RehabCare special committee), consisting of Harry Rich,
Anthony Piszel and Theodore Wight, to supervise the process and any negotiations, and authorized
the RehabCare special committee to retain legal counsel to represent the RehabCare board of
directors in connection with consideration of a potential transaction. The RehabCare board of
directors selected Messrs. Rich, Piszel and Wight, each of whom are independent directors, to serve
as members of the RehabCare special committee based on their collective financial expertise,
experience in negotiating complex business transactions, and industry knowledge. In addition, the
RehabCare board of directors asked CGMI to prepare, and review with its internal credit committee,
an analysis of the ability to finance an acquisition in the proposed range of prices.
On or about November 16, 2010, Dr. Short contacted Mr. Diaz and informed him that the
RehabCare board of directors had determined to pursue discussions regarding a potential
transaction. Dr. Short conveyed to Mr. Diaz that three threshold issues to be addressed were the
commitment of the Kindred board of directors to the proposed transaction, Kindreds ability to
finance the transaction, and the need to achieve a price for RehabCare stockholders above the
$32.00 to $34.00 per share range. Concurrently, CGMI informed Kindred that its internal credit
committee would be analyzing the financeability of the acquisition based on Kindreds proposed
range of prices at the request of the RehabCare board of directors. The RehabCare board of
directors believed such analysis by CGMI would assist the board in its negotiations with Kindred,
as well as in the boards analysis of the likelihood that the financing necessary for the merger
would be completed.
On or about November 18, 2010, CGMI internally contemplated the possibility of providing
financing to Kindred if invited to do so, and provided with advance consent by the RehabCare board
of directors. CGMI did not have any interaction with Kindred concerning CGMIs internal
contemplation of providing financing prior to December 16, 2010.
On November 27, 2010, RehabCare and Kindred entered into a mutual confidentiality agreement
that contained reciprocal standstill obligations of the parties. RehabCare began preparation of a
data room containing due diligence materials for Kindreds review.
Dr. Short and Mr. Diaz met on November 29, 2010 in Washington, D.C. at an industry meeting of
the American Hospital Association and discussed the key topics to be addressed at an upcoming
meeting of representatives of their respective boards of directors. Dr. Short and Mr. Diaz also
discussed potential accretion and synergies if a business combination were to occur.
At a November 30, 2010 meeting of the RehabCare special committee, CGMI presented its analysis
of Kindreds ability to finance an acquisition of RehabCare at various prices. Based on this
preliminary assessment,
CGMI believed Kindred would likely need to include an equity component as part of the
transaction consideration if it was to enter into a transaction at a price at or above its initial
range.
On December 2, 2010, the members of the RehabCare special committee and Dr. Short met with
Edward L. Kuntz, chairman of the Kindred board of directors, Dr. Thomas Cooper, Kindreds lead
independent director, and Mr. Diaz to discuss the terms of a potential transaction. Among the
topics discussed were transaction value, the availability of financing for the transaction, and
RehabCares request for a go shop feature to be included in any formal proposal to be made by
Kindred. In addition, in light of the previous, failed discussions between the parties regarding a
business combination, the RehabCare special committee sought assurances that the full Kindred board
of directors supported the proposed transaction.
The RehabCare special committee held meetings on December 7, 2010 and December 10, 2010, with
Bryan Cave LLP (whom we refer to as Bryan Cave), counsel to the RehabCare board of directors.
During these meetings, Bryan Cave reviewed and discussed with the RehabCare special committee the
terms of the proposed merger agreement to be provided to Kindred, and a potential timeline for the
transaction. The draft merger agreement was delivered to Morgan Stanley, financial advisor to
Kindred, following the RehabCare special committee meeting on December 10, 2010.
On December 12, 2010, Mr. Diaz and Dr. Short had a call to continue their discussions on the
potential transaction and to discuss an agenda for the meeting between the Kindred and RehabCare
management teams. Mr. Diaz updated the Kindred board of directors on the status of the discussions
at the regularly scheduled Kindred board of directors meeting on December 15 and 16, 2010. On
December 16, 2010, members of Kindreds management team, including representatives from Morgan
Stanley, met with representatives of RehabCares management team, including representatives from
CGMI, to discuss RehabCares businesses and operations and the potential synergies from a
combination of the companies.
On or about December 16, 2010, Kindred asked each of JPMorgan, Morgan Stanley and CGMI to
independently develop and submit a proposal for the potential financing of a transaction. Kindred,
with a market capitalization at the time of under $700 million, believed that these were the three
banks most familiar with its operations and credit profile and therefore would be the banks that
would be able to provide financing commitments that would be most favorable to Kindred, from
perspectives of conditionality and pricing, as well as from the perspective of the speed with which
they could make decisions relating to financing commitments to Kindred. In particular, Kindred took
into account the roles, under Kindreds credit facility, of JPMorgan, as bookrunner, lead arranger
and a lender, and of an affiliate of CGMI, as syndication agent and a lender.
Upon receipt of Kindreds invitation in December to submit a proposal for the potential
financing of a transaction, CGMI informed Mr. Rich and Dr. Short of Kindreds request, and
discussed the internal procedures that CGMI and its affiliates intended to put in place in the
event RehabCare consented to CGMIs or its affiliates potential participation in the financing.
These procedures would include having separate teams of representatives participate in each part of
the transaction, and a requirement that RehabCare would engage a separate financial advisor to
analyze the proposed transaction from a financial point of view for the RehabCare board of
directors and, if appropriate, deliver an opinion to the RehabCare board of directors. Moreover,
CGMI agreed that it would reduce its fees in connection with the fees that would be paid for the
second financial advisor and that CGMI and its affiliates would neither lead Kindreds financing
syndicate nor provide more than 50% of the total amount financed.
At meetings of the RehabCare special committee held on December 17, 2010 and December 23,
2010, Bryan Cave updated the RehabCare special committee on recent conversations with Cleary
Gottlieb Steen & Hamilton LLP (whom we refer to as Cleary Gottlieb), legal counsel to Kindred,
regarding process, timing and potential transaction structure. In addition, Mr. Rich advised the
RehabCare special committee that the leveraged finance group of CGMI had been invited to submit a
proposal to Kindred to participate in the financing syndication for the proposed transaction, and
described the internal procedures CGMI had informed him would be put in place at CGMI and its
affiliates regarding the potential dual roles in the transaction. The RehabCare special committee
discussed the desirability of permitting CGMIs leveraged finance group to participate in Kindreds
financing syndicate to enhance the certainty of Kindreds ability to finance the transaction, and
discussed with Bryan Cave the need to engage an additional financial advisor to the RehabCare board
of directors in the event CGMI and its affiliates participated in Kindreds financing syndicate.
The RehabCare special committee concluded that CGMIs participation in the financing syndicate
could enhance the certainty of Kindreds ability to finance the transaction
and increase competition among lenders, which could lead to Kindred securing more favorable
financing terms. The RehabCare special committee determined that RehabCare stockholders would
benefit from any such increased certainty and accordingly concluded that, if acceptable deal terms
were reached with Kindred, and CGMI was invited to participate in Kindreds financing syndicate,
the RehabCare board of directors would likely consent to CGMIs and its affiliates participation
in Kindreds financing syndicate subject to the conditions previously discussed and subject to the
requirement that the fees and expenses of the second financial advisor be fully credited against
the amount RehabCare had previously agreed to pay CGMI for its financial advisory services. The
RehabCare special committee directed Mr. Rich to contact certain parties to discuss potential
engagement to evaluate the fairness of the proposed transaction from a financial point of view, and
to confirm to CGMI that it and its affiliates were authorized to submit a proposal to Kindred,
subject to the conditions discussed.
Throughout December 2010, Kindred continued its due diligence review of RehabCare and
participated in various diligence meetings and telephone conferences with RehabCare management.
Subsequent to the December invitation to JPMorgan, Morgan Stanley and CGMI to submit proposals to
finance the transaction, senior management of Kindred engaged in regular communications with these
prospective sources of debt financing, RehabCare and RehabCares advisors regarding the proposed
acquisition financing.
On December 28, 2010, Kindred delivered a written proposal to RehabCare, which proposal was
for a price of $32.00 per share, payable $27.00 in cash and $5.00 in Kindred common stock.
Kindreds proposal included indicative terms of the debt financing commitments it expected to
receive, and provided a summary of key issues identified in the draft merger agreement previously
provided by RehabCare, including Kindreds requirement that the closing of the transaction be
conditioned on its receipt of financing and that the go shop provision proposed by RehabCare be
replaced with a window shop provision.
During a regular meeting of the RehabCare board of directors held on December 29, 2010, the
RehabCare board of directors reviewed the proposal delivered by Kindred. Bryan Cave also reviewed
with the RehabCare board of directors the legal duties applicable to its consideration of a
potential transaction. During the meeting, CGMI reviewed with the RehabCare board of directors
certain financial items relating to Kindreds proposal, and Bryan Cave reviewed various legal
aspects. CGMI also described to the RehabCare board of directors its preliminary analysis of the
indicative financing terms included in Kindreds proposal and confirmed CGMIs belief that at or
above the price proposed by Kindred, Kindred would need to complete an equity offering before
closing or include stock as a part of the consideration. The RehabCare board of directors discussed
its disappointment over the price per share and other aspects of Kindreds proposal. After
extensive discussion of the offer and the stand alone prospects of RehabCare, the RehabCare board
of directors determined that it would not accept Kindreds offer. Dr. Short also presented an
alternative transaction to the RehabCare board of directors to be considered in the event that
Kindred was not able to improve its offer to a level acceptable to the RehabCare board of
directors, pursuant to which RehabCare would offer to acquire Kindred. After continuing discussions
regarding the advantages and disadvantages of a potential transaction with Kindred and the proposed
alternative transaction, the RehabCare board of directors instructed Dr. Short to contact Mr. Diaz
to determine if Kindred would be willing to increase its offer to a level that the RehabCare board
of directors might find attractive, and to express RehabCares willingness to alternatively explore
an acquisition of Kindred. In addition, the RehabCare board of directors, along with Bryan Cave,
discussed Kindreds invitation to CGMIs leveraged finance group to submit a proposal to
participate in Kindreds financing syndicate and the desirability of permitting CGMIs leveraged
finance group to participate in such financing, if chosen by Kindred to do so, in order to enhance
the certainty of Kindreds ability to finance the transaction. After this discussion, the RehabCare
board of directors acknowledged that, subject to satisfaction of the conditions the RehabCare
special committee had previously discussed with CGMI, and pursuant to the terms of the engagement
letter with CGMI, it would consent to CGMIs leveraged finance group participating in Kindreds
financing syndicate if it were invited to do so.
Dr. Short contacted Mr. Diaz and informed him that the proposal delivered by Kindred on
December 28, 2010 was viewed as inadequate and was not supported by the RehabCare board of
directors. Dr. Short communicated to Mr. Diaz that the RehabCare board of directors would be
willing to continue discussions with Kindred regarding a potential transaction at a price of $35.50
per share or greater, as well as RehabCares willingness to explore the alternative structure if
Kindred was unable to improve the terms of its offer. RehabCare delivered a letter to Kindred on
December 31, 2010 reflecting the principal elements of the conversation between Dr. Short and Mr.
Diaz on December 28, 2010, as well as providing RehabCares response to the key issues in the
merger agreement identified by Kindred in its December 28, 2010 proposal.
During the week of January 3, 2011, representatives of RehabCare and Kindred continued to
communicate regarding terms of a potential transaction. Given the proposed equity component of the
merger consideration, they also discussed whether Kindred would consider providing an appropriate
level of representation from the current RehabCare board of directors on the post-transaction
Kindred board of directors. In addition, Kindred continued its due diligence process.
On January 7, 2011, Kindred delivered a revised proposal to RehabCare, increasing its offer
price to $35.00 per share, with $26.00 payable in cash and $9.00 payable in Kindred common stock.
Kindred noted that its ongoing discussions with JPMorgan, Morgan Stanley and CGMI regarding
acquisition financing reaffirmed its confidence that it would obtain a firm commitment on financing
in the next few weeks. In addition, the revised proposal provided an updated transaction timeline,
an outline of certain terms that Kindred would be including in its markup of the merger agreement,
and a description of open due diligence items.
At meetings of the RehabCare special committee held on January 9 and January 10, 2011, CGMI
and Bryan Cave discussed the terms of Kindreds revised proposal with the RehabCare special
committee and Dr. Short. CGMI noted that the increased stock portion of the consideration proposed
by Kindred would obviate the need for Kindred to undertake an equity offering between signing and
closing the proposed transaction and would assist in the certainty of Kindred obtaining financing
for the transaction. CGMI also described the fixed exchange ratio structure proposed by Kindred
relating to the stock component, and discussed other potential alternative structures for the stock
portion of the proposal that could be considered, including a fixed exchange ratio with a collar
and fixed value with a collar. The RehabCare special committee considered the accretive nature of
the transaction on Kindred common stock, which provided an opportunity for even further value to
the RehabCare stockholders from the consideration proposed by Kindred in the event that a fixed
exchange ratio was used. Bryan Cave described various other aspects of the revised offer, including
Kindreds proposed reverse termination fee structure related to its financing, the need for Kindred
stockholder approval due to the stock component of the transaction consideration, and Kindreds
refusal to allow for a go shop period following the execution of the merger agreement in light of
the substantial premium it was offering. The RehabCare special committee discussed the
appropriateness of requesting two seats on the Kindred board of directors upon completion of the
transaction, given the substantial amount of Kindred common stock that RehabCare stockholders would
receive under Kindreds proposal. The RehabCare special committee also discussed the need to
undertake a due diligence review of Kindred in light of the amount of Kindred common stock that
would be delivered to RehabCare stockholders. The RehabCare special committee discussed the
advantages and disadvantages of moving forward with a transaction on the terms contained in
Kindreds revised proposal. Based on the foregoing, the RehabCare special committee determined the
revised offer price, including the mix of cash and stock consideration, to be adequate to continue
discussions with Kindred and, after consultation with CGMI and Bryan Cave, developed a response to
Kindreds revised proposal, and directed Dr. Short to present that response to Mr. Diaz.
On January 11, 2011, Dr. Short and Mr. Diaz met at an industry conference in San Francisco,
California. Dr. Short informed Mr. Diaz that the RehabCare special committee had determined that
Kindreds revised offer price was adequate to continue discussions. Dr. Short and Mr. Diaz then
discussed the remaining key issues in Kindreds revised proposal. Mr. Diaz indicated that Kindred
would respond shortly with a revised draft of the merger agreement, which would reflect his
discussion with Dr. Short.
Beginning January 11, 2011, RehabCare began contacting additional financial advisors with
respect to a potential engagement to evaluate the fairness of the proposed consideration to be
received by RehabCare stockholders from a financial point of view and to deliver a fairness opinion
if appropriate.
Cleary Gottlieb delivered a revised draft of the merger agreement to Bryan Cave on January 13,
2011. Between January 13 and January 17, 2011, the RehabCare special committee of the RehabCare
board of directors, in consultation with CGMI and Bryan Cave, continued to evaluate a transaction
based on the terms proposed by Kindred in its revised merger agreement. During this period CGMI was
informed that RBC had been selected as a second financial advisor to RehabCare and its board of
directors, and CGMI agreed to reduce the fee it was to receive for its financial advisory services
by the full amount of the fees and expenses that would be paid to RBC for its services. RehabCare
selected RBC to act as its additional financial advisor based on RBCs qualifications, expertise
and reputation and its knowledge of the business and affairs of RehabCare. RehabCare also
confirmed that RBC was not conflicted in the transaction, including confirmation that it was not
participating in Kindreds financing syndicate.
On January 17, 2011, Dr. Short and Mr. Diaz met in New York and discussed certain of the key
open issues in the revised draft of the merger agreement provided by Kindred. Bryan Cave delivered
a revised draft of the merger agreement to Cleary Gottlieb on January 20, 2011.
From January 20 through January 26, 2011, the parties and their respective advisors continued
to engage in negotiations regarding the terms of the proposed transaction.
During January, RehabCare management and outside accounting and legal advisors conducted a due
diligence review regarding Kindred. No material issues regarding Kindred were identified.
On or about January 24, 2011, Kindred selected JPMorgan to be the lead lender in the provision
of debt financing commitments in connection with the proposed transaction. In addition, Kindred
selected the leveraged finance groups at Morgan Stanley and CGMI, respectively, to provide
financing commitments in connection with the proposed transaction. At this time, RehabCare
confirmed its consent to allow CGMIs leveraged finance group to provide this financing commitment
to Kindred.
On January 24, 2011, RBC was engaged by the RehabCare board of directors to evaluate the
fairness of the proposed consideration to be received by RehabCare stockholders from a financial
point of view.
Following receipt of a list of principal open issues delivered by Kindred on January 26, 2011,
members of RehabCares senior management, together with Bryan Cave and CGMI, participated in a
conference call with members of Kindreds senior management, Cleary Gottlieb and Morgan Stanley to
discuss those open issues. The parties resolved certain of the issues on that call, and instructed
Bryan Cave and Cleary Gottlieb to continue negotiating the remaining open terms of the merger
agreement. Cleary Gottlieb delivered a revised draft of the merger agreement on January 28, 2011
and an initial draft of the debt commitment letter on January 29, 2011.
At meetings of the RehabCare special committee held on February 1 and February 2, 2011, Dr.
Short, Bryan Cave and CGMI updated the RehabCare special committee on the status of the ongoing
negotiations with Kindred. The RehabCare special committee also reviewed the reverse due diligence
regarding Kindred performed by its legal and financial advisors. The RehabCare special committee
reviewed and discussed the current draft of the merger agreement and Kindreds debt financing
commitment, and the remaining open issues. The RehabCare special committee then directed Dr. Short,
together with Bryan Cave and CGMI, to continue negotiations with Kindred.
From February 1 through February 6, 2011, RehabCares senior management and legal and
financial advisors continued to negotiate with Kindreds senior management and its legal and
financial advisors to finalize the terms of the proposed transaction, including exchanging several
drafts of the merger agreement and debt commitment letters.
On February 3, 2011, representatives of CGMI discussed internally that certain risks
facing RehabCare could materialize in the future and that the financial projections prepared by the
RehabCare management, hereinafter referred to as Case A, did not fully account for such risks. On
that date, CGMI also discussed with RBC the possible inclusion of a Case B scenario, which would
reflect a less favorable reimbursement environment and lower volume growth, in its and RBCs
respective analyses. CGMI decided to discuss such matters with RehabCare management.
On February 3, 2011, representatives of CGMI contacted RehabCare management, and discussed
whether the Case A financial projections fully accounted for the potential reimbursement and other
business risks facing RehabCare in the future. Following such discussion, RehabCare management
identified and quantified assumptions that took into account such risks, and these assumptions
formed the basis for Case B financial projections. On February 4, 2011, the Case B financial
projections were shared by RehabCares management with RBC. CGMI and RBC have included Case A and
Case B in their analyses of the fairness of the proposed transaction.
On February 6, 2011, Kindred held a special meeting of its board of directors at which the
Kindred board of directors reviewed and discussed the proposed transaction with RehabCare.
Kindreds management, Cleary Gottlieb and Morgan Stanley participated in the meeting. The Kindred
board of directors discussed with management, Cleary Gottlieb and Morgan Stanley the proposed terms
of the merger agreement, as well as the proposed terms of the debt commitment letters, both of
which had been provided to the Kindred board of directors prior to the meeting. Morgan Stanley
reviewed with the Kindred board of directors a presentation setting forth its financial analysis of
the proposed transaction and rendered its oral opinion, which was confirmed in writing on February
7, 2011, to the Kindred board of directors that, as of that date, and based upon and subject to the
assumptions made, matters considered and qualifications and limitation on the scope of review
undertaken by Morgan Stanley, the merger consideration was fair from a financial point of view to
Kindred as discussed in the section entitled Opinion of Kindreds Financial Advisor beginning
on page 49 (such opinion is attached hereto as Annex D). Following review of such
presentation, and further discussion among Kindreds board of directors and management, the Kindred
board of directors voted unanimously to approve the merger, the merger agreement and the
transactions contemplated by the merger agreement.
On February 7, 2011, RehabCare held a regularly scheduled meeting of its board of directors at
which, in consultation with Bryan Cave, CGMI and RBC, the RehabCare board of directors reviewed and
discussed the final terms and conditions of the merger agreement and debt commitment letters. Bryan
Cave reviewed with the RehabCare board of directors the terms and conditions contained in the
merger agreement which had been provided to the directors prior to the meeting. CGMI and Bryan Cave
also reviewed the debt commitment letters being obtained by Kindred. CGMI and RBC separately
presented financial analyses of the proposed transaction, and each
delivered its oral opinion to the RehabCare board of directors, which opinions were confirmed
by delivery of written opinions dated February 7, 2011, to the effect that, as of such date and
based upon and subject to the factors, assumptions and limitations set forth therein, the merger
consideration to be received by RehabCare stockholders was fair, from a financial point of view, to
holders of RehabCare common stock (other than shares of RehabCare common stock owned by RehabCare,
Kindred or their wholly owned subsidiaries, or as to which dissenters rights are perfected) as
discussed in the sections entitled Opinion of RehabCares Financial Advisor CGMI beginning
on page 55 (such opinion is attached hereto as Annex B) and Opinion of RehabCares
Financial Advisor RBC beginning on page 62 (such opinion is attached hereto as Annex
C). Following further review and discussion among the members of the RehabCare board of
directors, including consideration of the factors described under RehabCares Reasons for the
Merger and Recommendation of RehabCares Board of Directors beginning on page 45, the RehabCare
board of directors determined that the merger, the merger agreement and the transactions
contemplated by the merger agreement were advisable and fair to and in the best interests of
RehabCare and its stockholders, and the RehabCare board of directors voted unanimously to approve
the merger, the merger agreement and the transactions contemplated by the merger agreement.
The merger agreement was executed by RehabCare and Kindred on February 7, 2011. On February 8,
2011, prior to the commencement of trading on the NYSE, RehabCare and Kindred issued a joint press
release announcing the signing of the merger agreement.
The Merger Opinion of RehabCares Financial Advisor CGMI Valuation Analyses of RehabCare
Selected Company Trading Analysis
This disclosure supplements the discussion at page 59 of the joint proxy statement/prospectus
under this subheading by deleting the first sentence of the first paragraph on this page and
replacing it with the following:
CGMI reviewed financial and stock market information and public market trading multiples of
RehabCare and the following five selected publicly held healthcare companies which, like
RehabCare, are each leading facility-based, post-acute healthcare service providers:
The Merger Opinion of RehabCares Financial Advisor CGMI Valuation Analyses of RehabCare
Selected Company Trading Analysis
This disclosure further supplements the discussion at page 59 of the joint proxy
statement/prospectus under this subheading by deleting the third sentence of the first paragraph
under this subheading and replacing it with the following:
Financial data for the selected companies, including 2011 estimated EBITDAR, were based
on information available from FactSet and public filings. Financial data for RehabCare,
including 2011 estimated EBITDAR, were based both on RehabCare managements estimates and
publicly available research analysts estimates relating to RehabCare, referred to as
RehabCare consensus estimates.
The Merger Opinion of RehabCares Financial Advisor CGMI Valuation Analyses of RehabCare
Precedent Transaction Multiples
This disclosure supplements the discussion at page 59 of the joint proxy statement/prospectus
under this subheading by deleting the second sentence under this subheading and replacing it with
the following:
These transactions were selected based on CGMIs belief that they were generally comparable
to the proposed transaction because, as is the case with this transaction, they involved the
acquisition of healthcare companies each of which are leading LTAC-based, post-acute service
providers with transaction values in excess of $200,000,000, announced since January 1,
2005.
The Merger Opinion of RehabCares Financial Advisor CGMI Valuation Analyses of RehabCare
Precedent Transaction Multiples
This disclosure further supplements the discussion at page 59 of the joint proxy
statement/prospectus under this subheading by deleting the table under the first paragraph under
this subheading and replacing it with the following:
Announcement Date | Acquiror | Target | EBITDA Multiple | Transaction Value | ||||||||
August 24, 2010 |
Kindred | Vista Healthcare, LLC (5 hospitals) | 6.7x | $ | 200,000,000 | |||||||
June 21, 2010 |
Select Medical Holdings Corporation | Regency Hospital Company, L.L.C. | 7.6x | $ | 200,000,000 | |||||||
November 3, 2009 |
RehabCare | Triumph Healthcare LLC | 6.4x | $ | 600,000,000 | |||||||
July 21, 2005 |
The Carlyle Group | LifeCare Holdings, Inc. | 6.8x | $ | 500,000,000 |
The Merger Opinion of RehabCares Financial Advisor CGMI Valuation Analyses of
RehabCare Discounted Cash Flow Analysis
This disclosure supplements the discussion at page 60 of the joint proxy statement/prospectus
under this subheading by deleting the first paragraph on this page and replacing it with the
following:
Discounted Cash Flow Analysis. CGMI performed an illustrative discounted cash flow analysis
to calculate the estimated present value of the standalone unlevered, after-tax free cash
flow that RehabCare could generate for calendar year 2011 through calendar year 2020. The
analysis was conducted on both RehabCares Case A and Case B projections. CGMI calculated
terminal values for RehabCare by applying to RehabCares fiscal year 2020 estimated free
cash flows a range of perpetuity growth rates of 1.75% to 2.25%, which range of growth rates
was selected by CGMI utilizing its professional judgment and experience, taking into
consideration long-term growth expectations for the industry, including population growth.
CGMI then discounted these cash flows and terminal values to illustrative present values
using a range of discount rates from 9.8% to 11.4%, which were derived by utilizing a
weighted average cost of capital analysis based on the capital asset pricing model and
taking into account certain financial metrics for RehabCare and for the United States equity
markets generally. The applied discount rates ranging from 9.8% to 11.4% were based upon
CGMIs judgment of an illustrative range based upon the above analysis. Based on this
analysis, CGMI calculated the following implied per share equity reference ranges for
RehabCare common stock, shown as compared to the implied merger consideration:
The Merger Opinion of RehabCares Financial Advisor CGMI Miscellaneous
This disclosure supplements the discussion at page 62 of the joint proxy statement/prospectus
under this subheading by deleting the second sentence of the first paragraph under this subheading
and replacing it with the following:
CGMI agreed to reduce its aggregate fees by $250,000 the amount of fees that would be
payable by RehabCare to RBC in connection with the delivery of a fairness opinion by RBC.
This disclosure further supplements the discussion at page 62 of the joint proxy
statement/prospectus under this subheading by inserting the following sentence after the first
sentence of the third paragraph:
Since January 1, 2009, other than any fees they will receive in connection with the proposed
transaction (as described above), Citi and its affiliates, other than its retail banking
affiliates, have received approximately $1,436,000, in the aggregate, in compensation for
work performed for Kindred and no such compensation from RehabCare.
The Merger Opinion of RehabCares Financial Advisor RBC RehabCare Financial Analysis
RehabCare Comparable Companies Analysis
This disclosure supplements the discussion at page 65 of the joint proxy statement/prospectus
by deleting the second sentence of the first paragraph under this subheading and replacing it with
the following:
The peer group to which RehabCare was compared consisted of the following U.S. publicly
traded rehabilitation care services, senior nursing facilities services and long-term acute
care hospital companies:
The Merger Opinion of RehabCares Financial Advisor RBC RehabCare Financial Analysis
RehabCare Comparable Transaction Analysis
This disclosure supplements the discussion at page 68 of the joint proxy statement/prospectus under
this subheading concerning the premiums associated with each transaction in RBCs RehabCare
comparable transaction analysis by deleting the first sentence of the first paragraph under this
subheading and replacing it with the following:
RBC reviewed selected financial information for the following selected, publicly announced
rehabilitation care services, senior nursing facilities services and long-term acute care
hospital transactions which were completed since January 1, 2005:
The Merger Opinion of RehabCares Financial Advisor RBC RehabCare Financial Analysis
RehabCare Discounted Cash Flow Analysis
This disclosure supplements the discussion at page 68 of the joint proxy statement/prospectus under
this subheading by inserting the following after the third sentence in the second paragraph under
this subheading:
The range of perpetual growth rates was selected after taking into account RehabCare
managements projected growth rate for RehabCare in the latter years of the projection
period.
Item 9.01.
(d) Exhibits
Exhibit 2.1 Amendment to Agreement and Plan of Merger, dated May 12, 2011, among Kindred
Healthcare, Inc., Kindred Healthcare Development, Inc. and RehabCare Group, Inc.
Additional Information About this Transaction
In connection with the pending transaction with RehabCare Group, Inc. (RehabCare), Kindred
Healthcare, Inc. (Kindred) has filed with the Securities and Exchange Commission (the SEC) a
Registration Statement on Form S-4 (commission file number 333-173050) that includes a joint proxy
statement of Kindred and RehabCare that also constitutes a prospectus of Kindred. The registration
statement was declared effective by the SEC on April 26, 2011. Kindred and RehabCare mailed the
definitive joint proxy statement/prospectus to their respective stockholders on or about April 28,
2011. WE URGE INVESTORS AND SECURITY HOLDERS TO READ THE JOINT PROXY STATEMENT/PROSPECTUS
REGARDING THE PENDING TRANSACTION BECAUSE IT CONTAINS IMPORTANT
INFORMATION. You may obtain a free copy of the joint proxy statement/prospectus and other
related documents filed by Kindred and RehabCare with the SEC at the SECs website at www.sec.gov.
The joint proxy statement/prospectus and the other documents filed by Kindred and RehabCare with
the SEC may also be obtained for free by accessing Kindreds website at www.kindredhealthcare.com
and clicking on the Investors link and then clicking on the link for SEC Filings or by
accessing RehabCares website at www.RehabCare.com and clicking on the Investor Information link
and then clicking on the link for SEC Filings.
Participants in this Transaction
Kindred, RehabCare and their respective directors, executive officers and certain other
members of management and employees may be soliciting proxies from their respective stockholders in
favor of the pending transaction. You can find information about Kindreds executive officers and
directors in the joint proxy statement/prospectus. You can find information about RehabCares
executive officers and directors in its amended Form 10-K filed with the SEC on April 28, 2011.
You can obtain a free copy of these documents from Kindred or RehabCare, respectively, using the
contact information above.
Forward-Looking Statements
Information set forth herein contains forward-looking statements, which involve a number of
risks and uncertainties. Kindred and RehabCare caution readers that any forward-looking
information is not a guarantee of future performance and that actual results could differ
materially from those contained in the forward-looking information. Such forward-looking
statements include, but are not limited to, statements about the benefits of the business
combination transaction involving Kindred and RehabCare, including future financial and operating
results, the combined companys plans, objectives, expectations and intentions and other statements
that are not historical facts.
The following factors, among others, could cause actual results to differ from those set forth
in the forward-looking statements: (a) the receipt of all required licensure and regulatory
approvals and the satisfaction of the closing conditions to the acquisition of RehabCare by
Kindred, including approval of the pending transaction by the shareholders of the respective
companies, and Kindreds ability to complete the required financing as contemplated by the
financing commitment; (b) Kindreds ability to integrate the operations of the acquired hospitals
and rehabilitation services operations and realize the anticipated revenues, economies of scale,
cost synergies and productivity gains in connection with the RehabCare acquisition and any other
acquisitions that may be undertaken during 2011, as and when planned, including the potential for
unanticipated issues, expenses and liabilities associated with those acquisitions and the risk that
RehabCare fails to meet its expected financial and operating targets; (c) the potential for
diversion of management time and resources in seeking to complete the RehabCare acquisition and
integrate its operations; (d) the potential failure to retain key employees of RehabCare; (e) the
impact of Kindreds significantly increased levels of indebtedness as a result of the RehabCare
acquisition on Kindreds funding costs, operating flexibility and ability to fund ongoing
operations with additional borrowings, particularly in light of ongoing volatility in the credit
and capital markets; (f) the potential for dilution to Kindreds stockholders as a result of the
RehabCare acquisition; and (g) the ability of Kindred to operate pursuant to the terms of its debt
obligations, including Kindreds obligations under financings undertaken to complete the RehabCare
acquisition, and the ability of Kindred to operate pursuant to its master lease agreements with
Ventas, Inc. (NYSE:VTR). Additional factors that may affect future results are contained in
Kindreds and RehabCares filings with the SEC, which are available at the SECs web site at
www.sec.gov. Many of these factors are beyond the control of Kindred or RehabCare.
Kindred and RehabCare disclaim any obligation to update and revise statements contained in these
materials based on new information or otherwise.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
REHABCARE GROUP, INC. |
||||
Date: May 12, 2011 | By: | /s/ Patricia S. Williams | ||
Patricia S. Williams Senior Vice President, General Counsel and Corporate Secretary |
EXHIBIT INDEX
Exhibit 2.1 Amendment to Agreement and Plan of Merger, dated May 12, 2011, among Kindred
Healthcare, Inc., Kindred Healthcare Development, Inc. and RehabCare Group, Inc.