There were 82 transactions announced in HH&HP; an increase of 30% from 2017. We have seen a correlation with this trend on smaller deals. Even with the regulatory headwinds of PDGM and the shrinking spread between reimbursement to direct labor costs (especially in HH), investors, top to bottom, continue to believe that HH&HP is a necessary low-cost alternative to post-acute care. Hence, HH&HP are becoming more, not less, prevalent in the healthcare continuum. We believe high transaction activity volume will persist. The evidence to support this is consistent across all deal sizes.
Large cap deal activity suggests that the market is healthy for sellside M&A, but the actual dollars invested are concentrated in a few deals. Of the $1.85 Billion in acquisition dollars, $1.4 Billion was transacted for the purchase of Curo Health Services by a consortium headed by Humana, and $340 million for the purchase of Compassion Care Hospice by Amedysis. Both deals were focused on gaining Hospice patients and represented premium pricing per census patient (approximately 100K a patient!). This is where the distinctions exist as compared to smaller deals, all the way down the deal strata to the lower middle market.
In 2018, our firm closed a transaction with Amedysis, who acquired a Northeastern Home Health operation. The pricing was slightly above the mean we see in our other Home Health deals, but nowhere near the multiples cited above. Moreover, the smaller sized HH&HP segment remains fragmented, unlike the larger deal world. This is highlighted by the consistent buyout and/or merging of competitors. We will get into specific metrics below, but keep in mind that the valuations tend to increase as market size increases…most likely due to scale and efficiencies in vertical integration.
Given the continued growth in Large Cap M&A, we remain confident that healthcare as an industry is in a sustained growth trajectory. America (unfortunately) is not getting healthier and national demographics continue growing older. These factors put an investment bullseye on the entire healthcare continuum. Even with a systemic impact to the economy (which we don’t see on the horizon) or a revolution in healthcare services billing (which is imminent), we believe the investment dollars will continue rolling in…top to lower market.
A look at Lower Middle Market HH&HP M&A
Let’s start at the beginning. First, there was light then larger companies started acquiring smaller companies to grow more quickly. Companies augment their market share and profit either organically or through acquisition (or both). Fortunately, as shown above, there are plenty of acquirers making the M&A universe very active.
Investors think of markets or industries as “consolidated” or “fragmented.” Healthcare services, especially Lower Middle Market HH&HP, remain HIGHLY fragmented. This makes it difficult for bankers (like us) to identify the buyer given there are a multitude of acquirers. With no clear acquirer as agencies get smaller in size. We have done numerous deals with strategic buyers, such as Kindred and Amedysis, but most of our deals are with regional buyers who are either independent operators or financial firms.
Of note in the large cap M&A growth trend: the average revenue of the seller, or the smaller of the two companies in a merger, has risen by nearly 14% since 2008. This may be a caveat of the aforementioned, indicating that larger investors are steadily moving towards larger deals because the market is more consolidated than it has been. As companies get larger, or funds get bigger, they can’t waste their time and resources on smaller deals. We believe the lower middle market is becoming more fragmented, not less. After 2009 (Great Recession) we saw many investors, specifically the ones deploying capital, dipping well below their historic target size criteria. This is not the case anymore, unless it is an ideal bolt-on company for the investor. This could mean that as the economy improves and cost of capital stays low, we will see less mid-to-large acquirers hunting in the lower market arena. This will translate to lower valuations, due to the absence of large strategic or platform buyers purchasing companies based on their revenue. Fortunately, as we stated above, the absence of larger cap buyers should NOT stunt the deal flow. Active deal flow should offset lower valuations…we shall see soon enough.
What is your company worth?
We have 30 years of data with close to 1000 deals in all healthcare services segments. Our team is committed to the highest standards of representation to our clients. With our deal flow, we can provide our clients with market intelligence that is second to none. We reviewed almost 50 transactions from the past 18 months, extracted non-HH&HP deals, and removed companies without revenue (ie start-ups). What we were left with was 15 HH&HP transactions.