Activity Spikes, Pricing Remains Steady…For Now
The results are in! The 2010 Hospital M&A market reported strong activity and posted robust numbers. A total of 73 domestic deals were announced involving 175 hospitals and 29,294 acute care beds. This level of activity shows a marked increase over 2009 when 52 deals were announced involving 80 hospitals with 10,064 beds. The hospital M&A market thus continues to climb out of the depths of the Great Recession, which bottomed in late 2008 and early 2009. But even though the pace and scope of all this deal making continues to grow, acquisition pricing for hospitals, as measured by certain multiples, held steady during 2010.
Buyers committed approximately $12.8 billion to carry out this activity, the highest level since 2006 when HCA was privatized by a consortium of private equity groups for $33.0 billion. Our 2010 data does include Community Health System’s (NYSE: CYH) proposed $7.3 billion acquisition of Tenet HealthCare Corp. (NYSE: THC), a hostile bid announced late in 2010. While Tenet has demurred so far, Community Health’s leadership appears strongly committed to seeing this deal through. Even if we omit this transaction, the 2010 Hospital market still has 72 domestic transactions involving a total of 125 hospitals with 15,864 beds for a combined price of $5.4 billion, all well above the comparable 2008 and 2009 levels. The Community-Tenet deal took an ugly turn in early April, and the market punished them both by sending their stock prices down.
Activity in the 2010 market was lackluster until federal health care reform was passed in March. Once it became law, the pace of M&A accelerated. With passage of the law and its effects on government reimbursement of hospital services, buyers and sellers could more accurately pencil out future levels of revenue and cash flow, putting them in a better position to negotiate a valuation of the facilities they wished to buy or sell. This appears to have released a pent-up backlog of deal making.
The 2010 data includes nine deals involving the sale of 16 bankrupt or otherwise financially distressed facilities; their combined value is approximately $600.0 million. This represents a dramatic increase over 2009, when just one such sale was announced. The evaporation of credit from the markets beginning in 2007, which weakened and propelled many hospitals toward bankruptcy, also emptied the coffers of potential buyers for them during 2008 and 2009. Once the tide of capital began flowing back in, buyers could again access the funds to buy these troubled facilities. There appears, in fact, to have been a degree of competition for these distressed facilities, driving the price to revenue multiple up to 0.4x in 2010 from the more usual range of 0.2x to 0.3x. This is a slight tell that pricing for hospitals may be poised to rise. In general, however, distressed sales are excluded from our calculations of acquisition multiples.
Based on transactions with the requisite figures, the average price/revenue multiple for all hospitals (except the bankrupt group) in 2010 was…Want to read more? Click here for a free trial to The Health Care M&A Monthly and download the current issue today