Thursday, July 22, 2010

Odyssey Healthcare (NASDAQ:ODSY): Downgrade to Negative at Susquehanna

Susquehanna is making an interesting call on Odyssey Healthcare (NASDAQ:ODSY) downgrading it to Negative from Neutral.

(Note that Gentiva Health (GTIV) agreed to acquire Odyssey Healthcare for $27/share in cash on May 24.)

Over the last few weeks, the prospects for the home health industry have taken a turn for the worse. While Gentiva’s purchase agreement for ODSY has no meaningful outs, SUSQ believes the shares are trading at a level that does not provide an attractive risk/reward. Thus, they encourage fundamental investors to take profits rather than wait for the final $0.50 arbitrage to completely play out.

Susquehanna is lowering their fundamental investment rating on the shares of Odyssey HealthCare, a leading hospice provider, to Negative from Neutral. ODSY is in the process of being acquired by Gentiva Health Services, a leading home health provider. Over the last few weeks, there have been a number of adverse developments regarding the home health industry, generally, and Gentiva Health Services, specifically. Despite this string of negative news, ODSY shares trade within 2% of the proposed take-out price of $27. Term loan commitments from Gentiva’s bank group are due later this week. If the loan syndication is delayed or runs into trouble, the firm believes it could put pressure on ODSY shares. If the syndication proceeds as previously expected, they believe ODSY shares would trade approximately $0.25 higher on the announcement (with roughly $0.25 left until final closing). Thus, we do not believe the risk/reward of staying in ODSY shares is compelling and would encourage fundamental investors to take profits now rather than wait for the arbitrage to completely play out. Negative Factor

The amount of debt being raised relative to Gentiva’s market capitalization is substantial, and debt to EBITDA for the combined GTIV/ODSY is expected to be 4.7x before giving effect to any deal synergies. The biggest component of the bank financing is still being syndicated with commitments on the Term Loan B being due late this week. Susquehanna believes that, if commitments are not forthcoming at the end of the week and there is a need to extend the commitment period, the arbitrage spread for ODSY could widen significantly. GTIV has a current equity market capitalization of $629 million, and an enterprise value of $727 million. To acquire Odyssey, GTIV is seeking to raise $1.2 billion in debt. Approximately $925 million of the funds being raised are slated to come from various bank lines – a $125 million revolver, a $200 million Term Loan A, and a $600 million Term Loan B. Beyond bank financing, Gentiva also hopes to raise $305 million through a high yield offering in early August. Neutral Factor.

The financial arbitrage community is placing considerable emphasis on the fact that the ODSY purchase agreement does not contain a financing contingency, which could be used as an out. In addition, the lead banks have made a commitment to fund the transaction even if it can not be syndicated and would have to declare a material adverse change in order to walk away from the deal. Because there is not financing contingency, GTIV would in theory have to come up with funding for the transaction in another way if the bank agreement were to have problems. However, given that neither home health nor hospice are asset intensive businesses, Susquehanna is not sure that alternative financing could be arranged quickly in light of the recent issues raised about home healthcare. They believe that, if the deal as proposed begins to slip, the situation could become very contentious and difficult, with the outcome of any litigation likely to take considerable time to play out. Neutral Factor.


Notablecalls: I would have pretty much dismissed the Susquehanna call if not for this:

Gentiva Loan Pushed Back Amid Soft Demand, SEC Probe

It looks like that A.J. Rice, the Susquehanna analyst wasn't aware of the loan being pushed back at the time of writing this call. Although, he does note specifically:

'The biggest component of the bank financing is still being syndicated with commitments on the Term Loan B being due late this week. Susquehanna believes that, if commitments are not forthcoming at the end of the week and there is a need to extend the commitment period, the arbitrage spread for ODSY could widen significantly. '

Don't get me wrong, I'm not expecting the deal to be a bomb. It looks like (despite the fairly modest break-up fee), GTIV has very few options to wiggle out of buying ODSY, even if they wanted to.

But the news does indicate the deal is about to get delayed. This means more risk, which in turn means the arb spread is going to widen. ODSY can only go lower from current levels.

Tough to put a target on this one but it seems sub-$26 looks likely.

4 comments:

Ron said...

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notablecalls said...

jesus

notablecalls said...

half decent this ODSY. worth 15-20c. not much.

hxl880 said...
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