The Health Care M&A Monthly: A Midsummer’s Hospital Market--
Sector Posts Hot M&A Activity This Summer
Since the passage of health care reform in mid-March, merger and acquisition activity in the Hospital sector has become robust. Prior to passage, 2010 posted only five deals involving five single hospitals for a combined purchase price of $94.2 million. Since passage, however, there have been 28 deals involving 57 hospitals for a combined total of $3.3 billion. Compared with the anemic activity pre-passage, the Hospital M&A market has seen the return of the multi-hospital deal, rather than the one-off acquisitions that characterized the 2009 and early 2010 market, jumping from one hospital per deal to just over two hospitals per deal. Debate leading up to the passage of the bill appears to have suppressed acquisition activity so that with its passage, pent up energy has been unleashed on the market.
In July’s largest acquisition within the U.S. borders, Health Management Associates (NYSE: HMA) is proposing to acquire Wuesthoff Health System, which operates a 291-bed hospital in Rockledge, Florida and a 115-bed facility in Melbourne. The purchase price is $145.0 million, to be funded primarily from cash. The price to revenue multiple is 0.5x and the price per bed is $357,143. This transaction, together with HMA’s recently closed acquisition of Shands Healthcare, enlarges the company’s hospital network in its home state. The Melbourne facility is located 30 miles from HMA’s Sebastian River Medical Center. On completion of this deal, HMA will operate 60 hospitals with 9,000 beds.
The District of Columbia is paying $20.0 million to acquire United Medical Center, fka Greater Southeast Community Hospital, a 184-bed acute care facility, in a foreclosure auction at which there were no other bidders. The target is the only hospital that serves residents of Washington, D.C. east of the Anacostia River. With an estimated $55.0 million in debt, the facility was financially distressed, which is reflected in the acquisition multiples of 0.2x revenue and $108,700 per bed. Specialty Hospitals of America, a private hospital management company which bought the hospital in 2007 for $31.5 million, or 0.38x revenue, strenuously objected to the sale on these terms, but ultimately took a haircut.
Emory Healthcare and HCA are unwinding their Atlanta-based joint venture. HCA will now assume full ownership of 247-bed Eastside Medical Center in Gwinnett County while Emory will assume full ownership of 72-bed Emory Johns Creek Hospital in Johns Creek. Differences in corporate culture, as well as HCA’s desire to simplify its joint venture structures in anticipation of its IPO, may both have contributed to this unwinding.
In a recent merger that moves from strength to strength, All Children’s Hospital & Health System (ACH) in St. Petersburg, Florida is integrating with the Johns Hopkins Health System Corp. in a non-cash transaction. The agreement calls for ACH to operate under the direction of Johns Hopkins Hospital governance structure. The integration is intended to expand the reach and impact of Johns Hopkins’ clinical, teaching and research programs. ACH is a regional referral center that draws its patients from all 50 states and 36 foreign countries. In essence, the deal combines two best-of-breed brands.
In a kind of combination we expect to see played out again and again in the coming hospital market, smaller 85-bed New Milford Hospital is merging with larger 371-bed Danbury Hospital. Under terms of the proposed deal, the two hospitals, located 16 miles apart in western Connecticut, are to operate under a single parent company. In effect, this affiliation gives the smaller facility a financial lifeline to a stronger regional hub.
July’s two largest hospital deals were in the Asia-Pacific region. The prize in the larger of the two deals was Asia’s largest publicly traded hospital operator, Singapore’s Parkway Holdings, Ltd. (S: PARM). Parkway operates 16 acute care facilities in Singapore, Malaysia, India and China with 3,400 beds. On a trailing 12-month basis, the company generated revenue of approximately $738.3 million and EBITDA of $126.2 million.
In March, India’s Fortis Healthcare (BO: FOHE), a hospital operator, acquired a 24% interest in Parkway at S$3.56 per share ($2.60) in a bid to expand its overseas operations. Up until late July, Fortis sought to gain full control over Parkway, but found itself caught up in a bidding war with Khazanah Nasional Berhad, the investment holding arm of the Government of Malaysia. In the end, Khazanah won with an offer of S$3.95 ($2.88) per share, or $3.3 billion, that trumped Fortis’s bid of S$3.80. Even though Parkway has some hospitals in Malaysia, this is Khazanah’s largest deal outside of the country. The deal is worth 4.5x revenue and 26.2x EBITDA, multiples American dealmakers can only dream about.
The good news for Fortis is that with Khazanah buying out its share, it will have eliminated its debt, leaving it primed for other deals. Fortis is controlled by the brothers Shivinder and Malvinder Singh, who were heirs to Ranbaxy Laboratories (BO: RANB) which their grandfather built and Daiichi Sankyo (T: 4568) bought for $4.6 billion in 2008. With no debt on Fortis’s books and a free cash reserve of Rs. 9.0 billion, the brothers are scouting out acquisition opportunities in Asia and the Middle East. Want to read more? Click here for a free trial and download the current issue today