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 March
2008
issue:
Home Health Care Heats Up--
Changes To Medicare Reimbursement Prompt Sell-Off
The Home Health Care M&A market is seeing increased activity. Recent changes
to Medicare reimbursement have put more properties on the market, depressing
prices with an increased supply and attracting buyers to bargains.
...
Biotech Leads
Health Care M&A--
Twelve Deals Announced Worth $4.1 Billion
A total of 12 deals were announced in the
bio-technology industry worth a combined $4.1 billion. Deal making is on the
rise as companies and their pipelines mature. Collaboration and development
agreements are dominating the action.
...
February 2008 M&A Market
February saw a total of 62 transactions worth
a combined $12.3 billion. Four billion-dollar deals are included in this
batch of deals.
...
In the Departments
Services
-Health Care Services
-Deal Summaries
-Additional Transactions
-Transaction Updates
Technology
-Deal Summaries
-Additional Transactions
-Transaction Updates
-Health Care Technology
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Articles Archive
Companies Mentioned in this issue:
March 2008
Symbols
3i Group plc p16
A
Abbott Laboratories p15
Acceleron Pharma p10
Accipiter Capital Management p3
Achilleion p4
Air Products Healthcare p2
Alopharma p16
Amedisys p3
American Homecare Supply p2
Amgen p10
Amgen KK p14
Amira Pharmaceuticals p14
AMN Healthcare Services p8
Arcapita, Inc. p3
AstraZeneca p16
B
Banc of America Securities LLC p16
Bayer HealthCare p15
Boehringer Ingelheim GmbH p15
Brandywine Senior Living p4
Brown & Toland Medical Group p8
BUPA Hospitals p4
C
Cain Brothers Investment Bank p8
California Pacific Medical Center p8
CALYON p16
CapitalSource p8
Celgene Corp. p10
CeNeS Pharmaceuticals p15
CIB p16
Cinven p4
Classic Hospitals Group p4
CollaGenex Pharmaceuticals p16
Colts Neck Village Assisted Living p8
Comprehensive Home Healthcare Services, Inc. p3
Cook Inlet Housing Authority p8
Cowan and Company p16
Credit Agricole p16
Credit Suisse p16
Critical Homecare Solutions Holdings p2
D
Danske Bank p16
Dyax p14
E
Emdeon Business Services p15
Emdeon Practice Services p15
European Capital Financial Services Limited p16
EUSA Pharma p14
Evangelismos p4
F
Family Home Health Care, Inc. p3
Forest Laboratories p16
FUJIFILM Holdings Corp. p16
G
Galderma Laboratories p16
Galderma, SA p16
GE Healthcare p15
General Atlantic p15
Genmab A/B p15
Gentiva Health Services p3
GlaxoSmithKline p14
H
Healthfield Group p3
HLTH p15
Home Health Care Affiliates, Inc. p3
Houlihan Lokey p8
Housecall Medical p3
Humana p8
Hunter-Fleming p14
Hygeia p4
I
Iasis Glenwood Regional Medical Center p4
Iasis Healthcare p4
InSight Health Services p4
Institutional Shareholder Services p10
IntegriCare p3
J
Jeffries Finance, LLC p2
JP Morgan p8
K
Kohlberg & Company, LLC p2
L
LCA-Vision p4
LGV Capital p4
L’Oreal p16
M
Marcus & Millichap p8
Mary Conrad Center p8
MBF Healthcare Acquisition Corp. p2
Medrad p15
Meridian Health System p4
Merrill Lynch Healthcare Capital Finance p8
Momentum Medical Group p8
Mylan p16
N
National Medical Health Card Systems p8
Navigant Capital Advisors p3
Nestle p16
Netsmart Technologies p15
Newron Pharmaceuticals, SpA p14
Nightingale VantageMed p15
Nueterra Healthcare p4
O
Odyssey HealthCare p2
Opi SA p14
Ouachita Community Hospital p4
P
PDL BioPharma p15
Pharmion p10
Pinewoods Assisted Living p8
Platinum Select, LP p8
Possis Medical p15
PricewaterhouseCoopers p16
Proxy Governance p10
R
RadNet p4
RainDance Healthcare Group p8
Raymond James Health Care Investment Banking Group p3
Regeneration Technologies p16
Rolling Oaks Radiology Imaging Centers p4
Rosewood Assisted Living p8
RTI Biologics, Inc. p16
S
SAC Capital Advisors p10
Sage Group p15
sanofi-aventis p14
Sierra Health Services p8
Spire Healthcare p4
Sutter Health p8
SXC Health Solutions p8
Sycamore Assisted Living p8
T
Taisho Pharmaceutical Co. p16
Takeda Pharmaceutical Co. p10
TLC Health Care Services p3
TLC Vision Corp. p4
Toyama Chemical p16
Tutogen Medical p16
U
UnitedHealth Group p8
V
Vaccinex p14
VistaCare p2
Vital Health Technologies p8
W
Warburg Pincus p8
WebMD p15
Whatman, plc p15
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Home Health Care Heats Up--
Changes To Medicare Reimbursement Prompt
Sell-Off
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article to a friend
Email Editor
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.
What about the Odyssey-VistaCare deal? It seems that even given the
depression in Home Health Care pricing, some shareholders felt that paying
0.6x revenue was too little for a cashflow-positive, publicly traded
company. Accipiter Capital Management, who together with its
affiliates owned nearly 10% of the outstanding shares of common stock of
VistaCare, fought the deal. Odyssey had offered $8.60 per share while
Accipiter believed $11.50 was a fairer price. Accipiter argued the Odyssey
bid ignored VistaCare’s cash balance net of Medicare liability of $1.40
per share. As we were going to press, however, a sufficient number of
class A common shares had been tendered to allow for a “short-form merger”
and the deal closed, so Accipiter’s remonstrations came too late.
Only time will tell whether this change to Medicare reimbursement will
have as devastating an effect on Home Health Care as the industry suffered
in the late 1990s. On some estimates, between one-quarter and one-third of
all home health operators, the majority of them small, sold out or went
out of business. We suspect that the current shake-out will be minor in
comparison, but that it will still provide ample opportunities for
industry consolidators.
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