Simplify the M&A Market

EXPERT OPINION: A Conversation with Gray Hampton

In this "Expert Opinion" interview, Gray W. Hampton III, Managing Director of Bank of America Merrill Lynch, discusses the capital-raising opportunities and the M&A market in seniors housing & care since the Wall Street crisis.

Gray HamptonWatch the video      Read the transcript

Gray W. Hampton is a Managing Director in the Corporate and Investment Banking Group at Bank of America Merrill Lynch. Mr. Hampton is responsible for BAML's activities in a several subsectors of HealthCare, including Life Science Tools, Post Acute Care and Health Care Information Technology. He is also a member of the BAS Opinion Review Committee. Mr. Hampton joined a predecessor of Bank of America Merrill Lynch in 1992. Prior to joining the firm, he was in Corporate Finance with Smith Barney and practiced law with Sullivan & Cromwell, both in New York. Mr. Hampton graduated Phi Beta Kappa and cum laude with a BS degree from Davidson College, studied at the University of Salzburg, Austria on a Rotary Scholarship and earned a JD degree from the University of Michigan Law School where he was elected to Law Review and graduated cum laude. 
 

Contact Information:
Gray W. Hampton
Managing Director
Bank of America Merrill Lynch
(646) 855-2922
gray.w.hampton@baml.com.

 
Watch the video of the interview: 
 

 

 

Read the interview transcript:

Steve Monroe:
As everyone knows, a couple of years ago, with the banking crisis and the Wall Street crisis, a lot of people were writing off Wall Street and investment banks as we know it and commercial banks. The industry was going to change and all that. But all I can say is, “Not so fast.”  They all obviously came back, except for the two that went under. And one that I think is coming back very strongly is Bank of America Merrill Lynch.

I have Gray Hampton, a managing director there, with me today. You know, it’s been a couple of tough years on Wall Street, but seniors housing has really weathered that storm…

Gray Hampton:
Yes.

Steve Monroe:
...probably better than anyone. What have you worked on most in the sector since, let’s say, the end of 2008?

Gray Hampton:
We’ve been very busy and I think even in 2008, we actually had a fair amount going on. But in 2009, we spent a substantial amount of time raising equity and debt. The equity markets were very slow in the first quarter and into the second quarter. But they opened up in the second half of the year. And the REIT industry, where I focus on the healthcare REITs, the REIT industry broadly speaking raised substantial amounts of equity and really recapitalized some of the businesses that were over-leveraged.

And I would say that most of the healthcare REITs who are good clients of ours issued equity during that time period, as well. They weren’t facing the balance sheet challenges that some of their REIT brethren in the non-healthcare space were, but nonetheless, they went out and raised capital. We did equity transactions for them. There were several bond transactions that we worked on. So I would say the last year and a half for us has been mostly capital-raising, it’s been largely public companies; we have done some private company transactions, as well. And the M&A business was very slow last year and it has started to pick up as we moved into this year.

Steve Monroe:
Everyone needs equity and we have the whole deleveraging of the country, basically, going on right now, except for the federal government. And this year Sun Healthcare did a very over-subscribed secondary equity offering in anticipation of splitting into two companies. Do you see more secondaries coming out in the market just to strengthen the operating companies? Or is that a one-off event because of their special spinoff?

Gray Hampton:
Sure, well, it is a unique situation. Having said that, I would expect that we would see further equity issuances from, again, the REITs, which will continue, I think, to be issuers of equity capital as they look for acquisition opportunities.

But at the operating level, as well, you are likely to see equity raised. I think there will be opportunities for these companies to buy other companies. There may be situations where it makes sense for companies to continue to delever. And there may be circumstances where some existing investors look to sell some of their secondary shares and redeploy that capital elsewhere as stock prices hopefully trend higher from where they have been over the last year and a half.

So, yes, I believe that there would be any of a number of different opportunities over the next year or several years where we’d see some activity of that nature.

Steve Monroe:
And you said you’ve done a lot of financings for REITs, to clean up their balance sheets. They’ve got, I would say on the healthcare REIT side, several billion of acquisition capacity.

Gray Hampton:
Clearly.

Steve Monroe:
Do you see them doing a lot more in the senior housing side?

Gray Hampton:
Absolutely. Yes, you will continue to see a substantial amount of interest in seniors housing assets. The Health Care REIT, Merrill Gardens deal announced recently I think is a good indication of that. There are other opportunities that people are looking at today. And I think seniors housing is of much interest.  You’ll continue to see some investment in the skilled nursing sector, as well.

Steve Monroe:
And the M&A market, you said that’s been a little on the slower side. We had a peak in 2006 of about $22.6 billion in announced senior housing and care deals. And then very quickly, in just a couple of years, that just came crashing down to $1.8 billion - which is really nothing. What do you see kickstarting the sector’s M&A business going forward? Is there something that you see that can do that?

Gray Hampton:
Honestly, it’s already in process. There are opportunities today that could be interesting to the healthcare REITs. I think that the cost of debt-capital is at levels that provide very attractive returns to investors. Because I think the healthcare REITs as perhaps distinguished from the operating companies have stock prices that are trading relatively well and not that far from 52-week highs, and in some cases, at all-time highs.

So the cost of capital is attractive today and justifies investment in assets. I think there are opportunities. There will be some activity potentially driven by impending tax changes and the desire to front-run changes in tax laws and the implication that has for the returns to investors.

So, yes, while we haven’t seen a lot of announced transactions over the last year and a half, if you ask me what has to change for transactions to be announced, I frankly think the ingredients are there and it’s probably time as much as anything else.

And, at the operating level, you’ll continue to see people looking at the market and seeing opportunities to perhaps diversify their business. There’s a lot of interest from the operating level in rehab and home health and sectors like that and I think there’ll also be opportunities to add assets to existing portfolios.

So my guess is it’s probably time more than it is a specific catalyst that causes the M&A activity to pick up.

Steve Monroe:
Well, I was going to ask you, is there any kind of one indicator that you personally follow that might tell you that we’re going to have a more active 2011 than 2010?

Gray Hampton:
You know, there’s really not a single indicator. A lot of the different ingredients that have to come together are in place. I mean, if you ask me to focus on one that is a very good indicator of whether or not we’ll see future M&A activity—and I think this is true not just in our sector, but across the healthcare sector generally speaking—just look where bond yields are. Look at where the 10-year is. And the cost of capital today is such that an environment with very low Treasuries, tight spreads, the cost to borrow is so low that the investment returns are relatively attractive, depending on what your cost of equity is.

So if I were looking at one single indicator, I’d probably just look at where the 7- or 10-year bond yield is.

Steve Monroe:
And that is, the yields today and the spreads are very low, if you can get the debt. And that’s the big question that’s keeping everyone, I think, out of the market. Probably more so on the small deals than the big deals.

Gray Hampton:
That’s right. I think that certainly the larger companies, the public companies that we deal with, I think that there’s ample access to the capital markets for those. I don’t think there are any issues, we don’t have any concerns about raising capital for many of the companies that we deal with. Again, you’re right, particularly the public and the larger companies.

Steve Monroe:
Yes, look at Health Care REIT. They did a five-year deal at sub-5%, I think, on the debt side and that’s huge.

Gray Hampton:
Correct, and they raised equity just this week.

Steve Monroe:
Right, that was 8 million shares or something like that.

Gray Hampton:
A little less than $400 million.

Steve Monroe:
All right, well, great, thanks for talking with us and I hope we have a more active 2011 than we had this year.

Gray Hampton:
I hope so, too.

Steve Monroe:
Maybe it’s in the works.

Gray Hampton:
Always a pleasure.

Steve Monroe:
Thanks.  
 

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