Gentiva Makes $1 Billion Deal for Odyssey HealthCare

Odyssey HealthCare (ODSY), a top provider of hospice care in the U.S., announced on Monday a $1 billion deal with Gentiva Health Service (GTIV), a major provider of home health-care services.

Odyssey had talked about making acquisitions -- after all, the company has a strong balance sheet and scale -- but decided instead to sell out.

And yes, Gentiva also has a strong balance sheet and scale. So assuming the integration is seamless, the result will be a powerful combination.

The Emergence of Hospice Care

Hospice care provides services to terminally ill patients and their families. It's a relatively recent industry, which got its start in the mid 1970s. Because of the benefits, the market grew quickly and in the early 1980s, Congress provided Medicare coverage for hospice care.

Odyssey has benefited from the trend. The company now has 20 in-patient facilities and 92 Medicare-certified programs. It runs operations in 30 states. In the latest quarter, Odyssey posted a 2.4% increase in net patient service revenues to $171.5 million. EBITDA was $25.1 million, up from $17.1 million in the same period a year ago. Over the past couple of years, Odyssey has focused on finding cost efficiencies, reducing bad debt exposure and dealing with Medicare requirements.

The Big Picture

Of course, the health-care industry is in the midst of disruptive changes. For example, the U.S. Senate Finance Committee recently raised questions about billing practices for home health-care companies like Gentiva. In other words, there could be future pricing pressures on the industry. As a result, it makes sense for Gentiva to look for ways to diversify. (Odyssey appears to have fewer issues in regard to government funding.)

What's more, the future for the company looks promising. Roughly 30% of Medicare expenditures come during a person's last year of life -- with 10% in the last month. While a hospital stay can cost over $5,000 a day, a hospice charges an average of $144 a day. There are roughly 2.5 million deaths in the U.S. every year.

So combined, Gentiva and Odyssey will have a powerful platform. Revenues will be over $1.8 billion, which will break down as 60% in home health care and the rest in hospice revenues. And the merger is expected to be accretive to adjusted earnings in the year following the closing.

In light of these factors, investors are certainly encouraged. Shares of Gentiva are up over 12% in midday trading on Monday.