Consolidation Resumes After Health Care Reform Passes
Passage of the Health Care Reform Act in March has released a wave of pent up activity in the health care merger and acquisition market. Now that the bill has become law, health care companies may begin to assess the impact, for good or ill, of the new provisions and regulations, and project reimbursement, revenue and cash flow figures for their businesses. Though a few companies, generally smaller providers such as mom and pop home health agencies, may decide to sell after penciling out the figures (and incidentally creating a buying opportunity), more companies will enter the market in search of acquisitions, either to make up for lost revenue, to capture greater market share, or both.
The Hospital industry exemplifies the increase in deal making since the passage of health care reform. A total of 13 deals has been announced year to date. Five deals worth $94.2 million were announced before the bill passed; they involved five hospitals. Since the bill passed, however, eight deals worth $2.2 billion were announced; they involved 20 hospitals. From at least one perspective, the Hospital industry will clearly benefit from the new legislation. Provisions to insure an additional 32 million people should increase hospital revenue and decrease, to some extent, losses from charity and uncompensated care.
Hospital Acquisition Multiples
What sort of market are dealmakers entering? Irving Levin’s Health Care Acquisition Report, 16th Edition, now available, provides the historical context for players entering the Hospital M&A market. It offers five-year trends for acquisition multiples, including price per bed, price to revenue and price to EBITDA. The latter two appear in the chart on page 3. While the P/EBITDA multiple is the most frequently used (and favored) valuation method, many observers like to know what the price per bed is as well, on the assumption that if an acquisition can be completed at a lower per-bed value, there may be more upside for the buyer, especially since capital costs will be lower. Over the past five years, the figures for average and median price per bed have fluctuated to somewhat different extents. The average price per bed has ranged between $297,100 in 2005 up to $398,590 in 2009 for a spread of just over $100,000; the median price per bed, however, has ranged between $219,764 in 2006 and $382,917 in 2009 for a wider spread of $163,153. Due to such spreads, observers rarely consider this multiple to be crucial.
Though not as readily invoked as the P/EBITDA multiple, the price to revenue multiple is a reasonable initial benchmark to consider when looking at hospital acquisitions. And with the relative paucity of P/EBITDA figures in the 2009 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 (such as price per bed), the P/R multiple has been the most consistent for many years. In the past five years, the average has ranged from a low of 0.74x in 2007 to a high of 1.17x in 2005, for a spread of 43 basis points. Similarly, the median has ranged between 0.60x in 2007 to 0.79x in 2005, for a spread of just 19 basis points. This represents a high 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 P/EBITDA multiple in the hospital acquisition market because reports of the financial data tend to lag the announcements of deals. It matters less for P/R 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 P/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.
April’s Acquisition Activity
The month of April saw the announcement of six deals in the Hospital sector. Half of them involved publicly traded operators as the buyers, the other half involved not-for-profit integrated delivery systems. All of them took place, broadly speaking, in the South. At the beginning of the month, LifePoint Hospitals (NASDAQ: LPNT) announced a deal to acquire and replace Clark Regional Medical Center, a 100-bed acute care hospital in Winchester, Kentucky. Clark Regional is located 25 miles outside of Lexington, in an MSA with 500,000 people. Under terms of the agreement, LPNT will pay $60.0 million to build and equip a new facility. The company will incur a nominal lease expense while the new hospital is being built. Taking the $60.0 million figure as the purchase price, the P/R multiple is approximately 1.1x.
Community Health Systems (NYSE: CYH) has entered into nonbinding LOIs for two hospitals. The first is Bluefield Regional Medical Center, a 240-bed acute care facility in Bluefield, West Virginia; the second is Marion Regional Healthcare System in Mullins, South Carolina, which operates 169-bed Marion County Medical Center, a 92-bed skilled nursing facility, a physician clinic and an outpatient center in neighboring Aynor.
Knapp Medical Center, a 209-bed hospital in Weslaco, Texas, is merging with Valley Baptist Health System, a two-hospital system in Harlingen, Texas. The combination of the two will result in a not-for-profit organization with greater resources and a broader reach than either of its component parts currently enjoys. Cain Brothers provided both Valley Baptist and Knapp Medical with advice on this transaction. Also in Texas, Arlington-based Texas Health Resources is joining forces with LHP Hospital Group to acquire Wilson N. Jones Medical Center, a 191-bed acute care hospital in Sherman. The buyers will share governance of the joint venture, which will invest $25.0 million in capital improvements over the next four years. The target will be known as Texas Health Presbyterian Hospital-WNJ.
Finally, Piedmont Healthcare and St. Joseph’s Hospital, both based in Atlanta, are forming a joint operating company (JOC) that would control assets contributed by both sides. Since St. Joseph’s is a member of Catholic Health East, the JOC would follow the ethical and religious directives for Catholic hospitals, but facilities and services outside the partnership would not be held to these directives. This creates a larger acute care delivery network with five hospitals in the Atlanta metropolitan area.
Though no specific details have yet emerged, Adventist Health System of Winter Park, Florida and University Community Health of Tampa have agreed to explore a merger between the two systems. The two have partnered before, forming a joint venture in early 2007 to build Wesley Medical Center in Pasco County.
As if health care reform weren’t enough, during April, U.S. antitrust regulators issued new guidelines to explain how they will scrutinize horizontal mergers. These measures replace 18-year-old guidelines and aim to provide greater transparency, making it easier for the Justice Department and the Federal Trade Commission to block mergers. In particular, it now appears that the agencies will have greater latitude and flexibility in characterizing markets, so that a rigid definition of a market cannot be as readily used as in the past to rebut challenges to a merger. We will continue to monitor the agencies’ actions to see how these new guidelines impact hospital deals.
Consolidation Resumes After Health Care Reform Passes