Subacute Behavioral Health Care’s Major Consolidator
We recently spoke with Dr. Barry Karlin, CEO of CRC Health Group, about the banner year that his company has been having. Headquartered in Cupertino, California, CRC is a provider of subacute behavioral health care. Throughout its 11-year history, the company has grown through acquisition, recently spending $150.4 million in 2004, $148.6 million in 2005 and $332.6 million in 2006. Maintaining a focus on private and commercial payors and decentralizing management have been two major keys to the company’s success.
CRC owns and operates drug and alcohol rehabilitation facilities and clinics that specialize in treating chemical dependency, other addiction diseases and behavioral health disorders such as eating disorders. Often, patients check in with a dual diagnosis of chemical dependency and some other behavioral problem. The company thus offers services including detoxification, inpatient treatment, day and intensive outpatient programs, aftercare, therapeutic living programs and opiate treatment programs. CRC delivers its services through two segments: residential treatment facilities and outpatient opiate treatment clinics.
CRC’s recent acquisition history appears in the table on page 4, which presents its three most recent years of dealmaking. As of September 30, 2006, CRC operated 103 facilities and clinics located in 23 states; it also provides online chemical dependency treatment available through eGetgoing. For the eight months ended September 30, 2006, it generated revenue of $166.2 million, EBITDA of $41.2 million and net income of $3.2 million. CRC announced its largest acquisition ever at the end of the third quarter, so we can expect significant growth in 2007.
The amount CRC paid on acquisitions in 2006 was greater than what it paid in the two prior years combined. The engine behind this growth spurt is the private equity firm Bain Capital Partners, LLC. Effective January 31, 2006, Boston-based Bain Capital carried out a leveraged buyout of CRC valued at $723.0 million, making it the largest behavioral health care deal of the year. Of that amount, $463.0 million was to pay former shareholders and $260.0 million to pay off debt. The price to revenue (P/R) multiple was 3.1x and the price to EBITDA multiple was 11.0x. At that time, CRC operated 89 facilities in 21 states treating approximately 22,700 patients per day. It received 75% of its revenue from nongovernmental sources, with 54% coming from self payers and 21% from commercial payers.
At the end of September, CRC acquired Cerritos, California-based Aspen Educational Group, which runs programs for underachieving and at-risk youth at residential treatment centers, wilderness therapy programs and summer camps, among others. It operates 32 programs in the U.S. and one in the U.K. CRC paid $296.4 million, or 1.99x 2006 annualized revenue and 17.4x 2005 EBITDA. The principal selling shareholders included such notables as Frazier Healthcare Ventures, Warburg Pincus and Sprout Group.
What justifies the high P/R multiples CRC has been paying for its acquisitions, relative to other behavioral health care deals? First and foremost, its sources of reimbursement. CRC has an enviable payor mix: 75% comes from nongovernmental sources, including self-payors and commercial insurance. Dr. Karlin informed us that the company does receive Medicaid but no Medicare at all. He reasons that Medicaid is less risky than Medicare because there are as many Medicaid payors as there are states. Once Aspen is integrated, the 25% governmental source will drop to about 18%. It seems unlikely that CRC will court a higher proportion of governmental sources; in any event, Dr. Karlin feels that the government diverts a “minuscule amount” for behavioral health, even though such care offers remedies for crime, safety and lost productivity, as well as their financial impact.
Another key is the decentralized management model CRC employs, allowing each facility to accommodate local nuances and to respond more nimbly to individual clients’ needs. As Dr. Karlin points out, “Health care delivery is local.” Keeping that mantra in mind, he believes, helps foster the best results for clients.
With its recent acquisition of Aspen, CRC has established itself in the eating disorders, adolescent weight management and troubled youth markets. It offers therapeutic boarding schools and healthy living programs. One of Aspen’s programs is located in England. Although there are no immediate plans for expansion there, Europe does represent an attractive market for CRC so the English operations will be maintained rather than divested. CRC has established itself as the premier provider of subacute behavioral health care and is unlikely to diverge from that model. While there appear to be no other similar companies of comparable size to buy, a number of mom-and-pop operations remain and it is likely that CRC will continue to grow through tuck-in acquisitions of such facilities.
While Bain Capital recapitalized CRC earlier this year, it will certainly want to recoup its investment and make a profit down the line. An IPO is foreseeable in a few years’ time, depending on market conditions.
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Subacute Behavioral Health Care’s Major Consolidator