Kindred Healthcare (NYSE:KND) thinks the sum is greater than the parts. That's why its offering Gentiva (UNKNOWN:GTIV.DL) shareholders a healthy 60% plus premium to combine the two companies.

The deal, which was flatly rejected by Gentiva, would net shareholders $7 per share in cash and another $7 per share in Kindred stock, but that could change given Gentiva's cold shoulder.

Given that backdrop, let's take a closer look at Gentiva and what Kindred hopes to gain.

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Digging into the deal
Kindred believes that after ex-ing out overlapping costs, acquiring Gentiva would immediately increase its earnings. In fact, in Kindred's investor presentation touting the benefits of the deal, it refers to the earnings impact as "significant". That significant bump in earnings is tied in part to $60 to $80 million in costs the company thinks it can cut from the combination thanks to the two overlapping in 20 of 21 core integrated care markets across the 47 states Kindred currently serves.

Here's what each of these companies brings to the table.

Kindred operates 2,300 locations, including hospitals, rehab centers, nursing centers, and home health and hospice. Roughly 50% of its business comes from hospitals, and payment for patient care comes far more significantly from commercial insurance than at Gentiva.

Source: Kindred Healthcare Investor Relations Website

Gentiva operates 500 locations serving home health, hospice, and community care markets. It gets roughly 50% of its sales from providing home health services and more than 90% of its services are paid for by Medicare and Medicaid.

Source: Kindred Healthcare Investor Relations Website

If Kindred can convince Gentiva shareholders to embrace a deal, the combined company would generate combined revenue of more than $7 billion. That would make it more than twice as big as Select Medical, more than three times bigger than Healthsouth, and more than five times bigger than Amedisys.

Source: Kindred Healthcare Investor Relations Website

The deal could potentially mean aggregate sales growth going forward too. That's because many of the businesses can provide referrals to each other. For example, rehab care is a natural source for home health care, and home health care is a natural referral source for hospice care.

On their own, each company is already attempting to unlock those referrals. Kindred is doing it through its continue the care program, while Gentiva has embraced One Gentiva.

Gentiva's numbers
Gentiva posted sales of $488 million in the first quarter, up 17% thanks to a late 2013 acquisition of Texas based Harden Healthcare, resulting in EPS of $0.13.

Home health sales rose 8% to $256 million, hospice sales fell 3% to $174 million, and its new community care segment -- created by the Harden acquisition -- posted sales of $57 million.

Home health sales would have been better but miserable weather resulted in 60% of Gentiva's offices closing for at least one day, reducing sales by an estimated $7 million.

Gentiva's hospice business is big, but it's also cost-heavy and that's weighed down profit. Gentiva is shuttering offices and cutting expenses, helping the segment's gross margin improve slightly between the fourth and first quarter. Gentiva is guiding for mid 40% range gross margin for hospice for the remainder of 2014 and cost cuts could be profit friendly next year given that the net effect of regulatory price changes for hospice care is expected to result in a 1.3% rate increase for hospice providers in 2015.

Gentiva also operates a community care business that had sales of $57 million in the first quarter. The community care business serves dual eligible (Medicare and Medicaid) elderly patients, and the potential growth in dual eligibles thanks to health care reform was a key reason behind Gentiva's acquisition of Harden last year.

Across all Gentiva's segment, gross margin has been falling; however, that's due in part to the new community care business, which carries lower gross margin of just shy of 30%. Regardless, Gentiva's gross margins are handily higher than Kindred's. 

KND Gross Profit Margin (Quarterly) Chart

KND Gross Profit Margin (Quarterly) data by YCharts

Fool-worthy final thoughts
Gentiva thinks sales will range between $1.9 billion and $2.1 billion, producing EPS of $0.85 to $1.15. Given nearly 10,000 baby boomers turn 65 every day, demand for home health, hospice, and assisted living should provide industry tailwinds for decades. That has to be incredibly attractive to Kindred, particularly given that larger operators will be far better positioned to handle regulatory hiccups than smaller operators. 


Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.