The Health Care M&A Monthly: Home Health Care Heats Up–

Changes To Medicare Reimbursement Prompt Sell-Off
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What do the housing market and Home Health Care M&A market have in common? Both are seeing an increase of properties going on their respective markets, but for different reasons. As the media has been hammering home, inability to pay off subprime mortgages is causing the number of foreclosures in the housing market to balloon. In Home Health Care, however, changes to government reimbursement protocols that came into effect at the beginning of the year seem ready to create yet another shake-out in the industry as the financially weaker operators who have done the math and concluded that they cannot make a go of it under the new regime decide to sell out to larger firms, often regional consolidators.
The Home Health Care M&A market saw relatively robust action in February, thanks in part to changes in Medicare reimbursement. Under changes implemented January 1, the new rules call for a 2.75% case mix (rate) reduction over the next three years with the potential for a fourth year at 2.71%. In 2008, that reduction will be somewhat offset by a positive market basket adjustment that also came into effect on January 1. These changes, long threatened and now realized, do not bode well for smaller operators whose financial resources are already stretched thin. The surfeit of home health agencies and operations coming to the market as a result of these changes has naturally had the effect of depressing pricing throughout the industry as supply increases relative to recent demand. So the large consolidators have gone bargain-hunting to take advantage of the low prices. Last month, for example, we reported that Odyssey HealthCare (NASDAQ: ODSY) had bid $147.1 million to buy up competitor VistaCare (NASDAQ: VSTA). That price worked out to just 0.6x revenue, a multiple which in the past would have been reserved for a small operator.
Despite a general decline in home health pricing, however, home infusion companies, long an exception in the industry, continue to command top dollar. Kohlberg & Company, LLC, a private equity firm, is selling Critical Homecare Solutions Holdings (CHS), a home infusion and specialty infusion company based in Conshohocken, Pennsylvania to MBF Healthcare Acquisition Corp. (AMEX: MBH). MBF is a publicly traded, special-purpose acquisition company. (It should be noted that CHS withdrew its IPO in mid-February to pursue this deal with MBF; the downturn in the IPO market would have compromised CHS’ ability to raise as much capital as it had planned on.) The price tag for the current deal is $445.0 million. CHS provides its services through 33 infusion locations in 14 states, primarily in the eastern United States. It also provides over 350,000 nursing and therapy visits and 500,000 private duty nursing hours per year to patients in the home from 32 home nursing locations in three states. CHS generates annualized revenue of $218.0 million and EBITDA of $43.0 million, so the relevant acquisition multiples are 1.9x revenue and 9.8x EBITDA.
As a result of this combination, CHS becomes a publicly traded corporation; the goal of this deal is to position CHS to tap the public equity markets for growth in the home infusion market, one of the hot segments of the industry at present and one that seems on the verge of getting even hotter (see our November 2007 issue). Further growth is anticipated as new injectable drugs are developed. Currently, four hundred new specialty infused drugs are in the pipelines of pharmaceutical companies; when they come to market, many of them will be administered through home and specialty infusion companies. CHS is one of the top four home infusion companies in the country, which between them account for just 25% of the $5.0 billion home infusion market. The remaining 75% consists of smaller operators ripe for consolidation; the current deal puts CHS in a position to be a buyer rather than a seller. The $445.0 million purchase price is to be funded through approximately $180.0 million of cash, about $180.0 million of debt provided by Jeffries Finance, LLC, a $35.0 million equity issue of MBH stock and a commitment to buy another $50.0 million in shares of MBH stock. The combined company is to be lead by CHS President and CEO, Robert Cucuel, who previously held those positions at Air Products Healthcare and American Homecare Supply. Over the past 12 years, he and his management team have integrated over 60 acquisitions, and may be expected to do so going forward to fuel CHS’ growth.
For the time being, home nursing providers are making deals near historical levels. Amedisys (NASDAQ: AMED) announced two transactions in February. In the larger of the two, indeed, in the largest deal it has ever announced, AMED is acquiring TLC Health Care Services from the private equity firm Arcapita, Inc. for $395.0 million in cash. Based in Lake Success, New York, TLC provides home nursing and hospice services from 92 home health and 11 hospice agencies in 22 states. Once this transaction closes, AMED will operate 480 agencies in 35 states, Puerto Rico and the District of Columbia. This deal helps establish AMED as the largest Medicare-focused home nursing company in the country with a market cap of $1.1 billion. The market welcomed news of this acquisition, sending shares of AMED up 5%, no small feat in this market. The price to revenue multiple is 1.3x and the price to EBITDA multiple is 6.1x. These figures appear to be close to what AMED has paid for larger deals. In July 2005, it paid $106.8 million, or 1.0x revenue and 5.7x EBITDA, for Housecall Medical; in August 2007, it paid $68.0 million, or 1.25x revenue, for IntegriCare. But if we factor out the assumed premium for this being AMED’s largest deal, then pricing is trending down. While not quite as rich as the Critical Homecare multiples noted above, we have little doubt that the sale of TLC provided Arcapita with a handsome return on its investment; after all, Arcapita had purchased the company out of bankruptcy in 2005 together with management. This is Arcapita’s fourth successful exit from its health care investment practice. The current deal is to be financed from a new $500.0 million credit facility AMED has secured. Raymond James Health Care Investment Banking Group provided AMED with financial advice on this deal while Navigant Capital Advisors provided TLC with consulting and advisory services. In its second February acquisition, AMED paid $43.0 million in cash and notes to buy Family Home Health Care, Inc. and Comprehensive Home Healthcare Services, Inc. from a single holding company. The two firms operate 21 home health locations in Kentucky and another three in Tennessee. The price to revenue multiple for the deal is 1.1x. Both Kentucky and Tennessee are certificate-of-need states, which AMED likes to target as often as it can. The local virtual monopolies that CONs may confer on their holders serves as a bulwark against competition, and therefore makes them more valuable than properties without CONs.
Gentiva Health Services (NASDAQ: GTIV) paid $55.0 million in cash, or 1.5x revenue, to acquire Mississippi-based Home Health Care Affiliates, Inc., a company that operates home health and hospice agencies through 14 locations in the state under the brand names Gilbert’s Home Health and Gilbert’s Hospice Care. The business covers 50 of the state’s 82 counties. Of the target’s total revenue of $37.0 million in 2007, $33.0 million came from home health and $4.0 million from hospice revenue. The target has a business mix that is about 81% Medicare. Also making it attractive is the fact that Mississippi is a CON state. With its entry into Mississippi, GTIV now has a presence in 37 states. This is the second-largest acquisition that GTIV has made in the home health arena. In January 2006, it acquired The Healthfield Group and its 130 locations in the Southeast for $454.0 million. At that time, the transaction, which increased Gentiva’s size by nearly one-half, was valued at 1.6x revenue and 9.1x EBITDA. Comparison with earlier periods thus suggests that price stagnation in home nursing is beginning to set in.
 
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