Recent Dealmaking Emphasizes The Middle Market
The hospital M&A market in 2008 represented a departure from the markets in 2006 and 2007 in that it lacked the very large, multi-hospital transactions which tended to skew results of those earlier years. In 2006, for example, a consortium of private equity companies privatized HCA, Inc. for $33.0 billion; in 2007, Community Health Systems (NYSE: CYH) paid $6.8 billion for Triad Hospitals. In 2008, by contrast, the largest transaction in terms of facilities involved the sale of a minority interest in a portfolio of seven hospitals. With the credit crisis beginning in mid-2007, financial buyers such as private equity groups, who had been so active in 2004-2006, were largely absent in 2008. As in 2007, only one deal was carried out by a private equity firm in 2008; the remaining deals all had strategic buyers. Details and analysis of the 2008 M&A market for hospitals may be found in Irving Levin’s Health Care Acquisition Report, 15th Edition.
Another feature that characterized the hospital M&A market for 2008, as it did in recent years, was a reshuffling of for-profit portfolios to create stronger regional networks and cast off financially, strategically and geographically marginal, outlying facilities. Tenet Healthcare Corp. (NYSE: THC) sold six hospitals in five deals. Health Management Associates (NYSE: HMA) sold one hospital in one deal and a minority interest in seven other hospitals in another deal. Envision, HCA and LifePoint Hospitals (NYSE: LPNT) sold two hospitals apiece. Among the buyers, for-profit Community Health Systems, Legacy Hospital Partners, Prime Healthcare Services, Rural Healthcare Developers and Vibra Healthcare announced two acquisitions apiece. In the not-for-profit cohort, Clarian Health Partners announced three deals while Advocate Health Care, Medical Center Hospital and Providence Health & Services each announced two.
The deal volume in 2008 continued in the range of 50 to 60 deals per annum, as in recent years. However, the dollar value of hospital transactions, based on disclosed prices, declined from $8.8 billion in 2007 to $2.5 billion in 2008, closer to the $2.8 billion posted in 2005, the last previous year without a mega-transaction.
Of the 60 transactions announced in 2008, targeting a total of 78 hospitals and 5,282 acute care beds, five involved the acquisition of six long-term acute-care hospitals, or LTACs, with approximately 339 beds (2007, three LTACs with 150 beds). While their pricing tends to be marginally higher than that of general acute care hospitals, their results have been integrated with our figures in this section.
Five transactions during 2008 involved the acquisition of assets in bankruptcy: five hospitals with 966 beds. The median price to revenue multiple for such facilities was 0.28x, approximately one-third of what a non-bankrupt hospital could command. It differed little from 2007, which posted six deals involving the acquisition of six bankrupt hospitals with 1,446 beds at a median price to revenue multiple of 0.30x. The bankrupt facilities do not figure in our acquisition multiples for the broader hospital M&A market.
The year 2008, like 2005 but unlike 2006 and 2007, saw no billion-dollar deals in the hospital sector. In keeping with its focus on the middle market, the 2008 hospital market had nine deals with price tags of $100.0 million or more (2007, seven), but none over $300.0 million. Eight of the transactions involved the acquisition of less than a 100% interest in the target facility; in such cases, the acquisition multiples in the statistics we present here have been adjusted to reflect 100% ownership.
Hospital Acquisition Pricing
Although not as readily invoked as the price/EBITDA multiple, the price/revenue multiple is a reasonable initial benchmark to consider when looking at hospital acquisitions. And with the relative paucity of price/EBITDA figures in the 2008 hospital market, more reliance must be placed on the P/R multiple. Where many statistics in the hospital acquisition market have exhibited wide variances from year to year, the price/revenue multiple has been the most consistent for many years. As the chart on page 8 of the May issue of The Health Care M&A Monthly shows, over the past five years, the average has ranged from a low of 0.61x in 2004 to a high of 1.17x in 2005, for a spread of 56 basis points. Similarly, the median has ranged between 0.53x in 2004 to 0.79x in 2005, for a spread of 26 basis points. (It should be noted that if Tenet Healthcare’s divestments of 2004 were omitted from the calculations, the average price/revenue multiple for 2004 would be 0.72x while the median would be 0.62x, consequently narrowing the spread between five-year highs and lows to just 45 basis points and 17 basis points, respectively.) This represents a remarkable degree of consistency, which is compounded by the fact that the difference between the average and median in most of the years is so small.
It has always been a challenge to derive an accurate price/EBITDA multiple in the hospital acquisition market because reports of the financial data tend to lag the announcement of deals. It matters less for price/revenue because the level of revenues tends to fluctuate less from year to year than does the level of cash flow. Because the buyer has more current financial data when making the offer, we have to assume that the price/EBITDA multiples in this Report are somewhat high because they are based on one- or, occasionally, two-year old information. Moreover, buyers usually price their acquisitions based on pro forma EBITDA, and will ignore the historical performance if they believe it to be misleading.
