The Health Care M&A Monthly: Valuing Hospitals Today--
2011 Saw Upward Pressure On Acquisition Multiples
During 2011, we saw some upward pressure on the acquisition multiples for hospitals due to competition and a market that expanded over the past four years. The results are reported in Irving Levin’s The Health Care Services Acquisition Report, 18th Edition, available now.
According to our figures, the 2011 hospital M&A market reached the highest level of deal making in the five years 2007-11. It involved 90 deals targeting 156 hospitals and 24,291 beds. Hospital M&A has steadily grown from the depths of the Great Recession in 2008 when 60 deals were announced targeting just 78 hospitals with 5,282 beds. Accordingly, the deal making in 2011 was 50% greater than in 2008; the number of hospitals acquired, 100% greater; and the number of beds involved, 360% greater.
Of the 90 transactions announced in 2011, 10 involved 11 critical access hospitals with a combined total of 325 beds; six involved six specialty hospitals (e.g., dedicated to cardiology) with a combined 440 beds; four involved the acquisition of four long-term acute care hospitals, or LTACs, with approximately 268 beds; and two involved 15 surgical hospitals with at least 20 beds. The remaining 68 deals involved the acquisition of 120 general acute care hospitals with 23,238 beds.
A total of $8.2 billion (in disclosed prices) was paid in 2011 to finance the year’s hospital M&A activity, up from $5.5 billion in 2010 and $1.7 billion in 2009. This growth signals a market that is picking up steam.
Based on our admittedly modest dataset, critical access hospitals commanded an average price to revenue multiple of 0.52x and an average price to EBITDA multiple of 8.0x. (The medians are the same.) The small size of these facilities, which generally have 25 beds, limits their ability to lower capital costs, accounting in part for their lower multiples. The presence of this subset within the larger dataset partly explains why the 2011 median price to revenue multiple is greater than the average. Remove the critical access hospitals and the gap between the two narrows: the average rises to 0.79x and the median to 0.81x.
But despite the increase of the 2011 figures over the previous year’s, they still fall within a relatively narrow range of variation, as can be seen in the chart above. While increases in competition for hospitals may tend to apply upward pressure on pricing, as appears to have been the case in 2011, the unrosy, uncertain financial outlook for hospital reimbursement serves as a counterbalance and helps keep multiples in this range......Want to read more? Click here for a free trial to The Health Care M&A Information Source and download the current issue today