Healthcare Industry is Pillar of Strength in Otherwise Weak Economy

Although the Federal Bailout has done nothing to alleviate the nationwide credit crisis, the healthcare services mergers and acquisitions marketplace continues to be robust. On January 10, 2009, the Wall Street Journal reported that, although the economy lost 2.5 million jobs in 2008, the healthcare services industry is the rare exception where jobs are still being created. The healthcare services industry remains one of the brightest spots in an otherwise gloomy economy.

Economic fundamentals continue to drive growth and consolidation in the healthcare services industry. Since credit is not as available as it has been in the past, buyers who rely on external financing are being as conservative and strategic as possible so as to avoid the necessity of refinancing in these unfavorable conditions. Sellers are wary of prospective buyers who are still relying on significant leverage to fund transactions. As always, cash is king and buyers with cash are in the best position to secure and close transactions.

The bottom line is that there is still more money chasing good deals than there are good deals on the market. Thus, prices are holding in the 4-5xAEBITDA range for smaller transactions. Due to the relative strength of the healthcare services industry, several types of buyers are in the market for acquisitions including large publicly traded companies, private regional operators, and private equity groups seeking platform and add-on acquisitions.

Public companies are often a reliable barometer of the relative strength or weakness of any given segment. Some publicly traded healthcare service companies are being hurt by external conditions (O2 Therapy, Long Term Care) while others seem to be benefiting from the malaise (Home Health). Public companies whose stock prices have been hammered are still in the market for highly strategic opportunities while those that are doing well are being more aggressive about pursuing acquisitions in order to position themselves to best capitalize on the eventual rebound.

Privately held regional operators are very actively pursuing acquisition candidates to facilitate strategic growth. They are taking advantage of the cash on their balance sheets to secure transactions with no financing contingencies. Typically, this type of buyer is looking for a smaller acquisition candidate upon which they can build something larger.

Private equity investors are as interested in healthcare services as they ever have been. With almost every other industry in the economy suffering a contraction, healthcare services is one of the only industries that can offer private equity investors the promise of continued and steady growth for the foreseeable future. Generally speaking, acquisition candidates must have an adjusted EBITDA of at least $1.5 Million in order to qualify as platform investments. However, since many providers have recently been recapitalized by private equity investors, smaller opportunities are attractive as add-ons to facilitate the strategic growth of portfolio companies.

Valuations of healthcare service providers continue to be a mixed bag. Medicare certified home health agencies lead the pack as all three types of buyers continue to bid prices up to their historic highs. We’ve seen some signs of life in the healthcare staffing segment, but prices are still down from what they were a few short years ago. The DME and O2/Respiratory therapy markets are still relatively sluggish as the industry deals with the uncertainty associated with the false start of competitive bidding, the 36 month cap and relentless cuts to reimbursement. Although under some pressure due to weak economic conditions, demand is still high for private pay non-medical homecare providers and valuations are commensurate with those of Medicare agencies.

While the overall economy is experiencing some scary turbulence, the healthcare services industry is riding out the storm on the strength of market fundamentals. Regulatory changes down the line could present new obstacles for some providers to overcome, but for now this is one of the best sectors in the entire economy.

We still have not had a single transaction terminated for lack of financing since the beginning of the financial crisis (knock on wood!!!). To the contrary, we closed 16 transactions in the final quarter of 2008 and have many more scheduled to close in the first quarter of 2009.

One way to keep apprised of all this activity is to join our mailing list. We announce all new listings via email as they become active. We don’t send annoying junk-mail, contrived awards or canned statistics, just announcements of new listings to make both buyers and sellers aware of what is available in the marketplace. ...and we would never even consider selling or sharing your contact information with any third party. To get on the list, click here.

Business As Usual During Alterations

Everybody in the healthcare services industry is asking the same question: How will the crisis on Wall St. affect us? Although turbulence in financial markets certainly warrants concern, we feel rather bullish about the healthcare services mergers and acquisitions marketplace. Healthcare services is a huge industry that is characterized as much by rapid growth as it is by a high level of fragmentation. These are the fundamentals that drive consolidation and these are the fundamentals that attract capital in the form of both equity and debt.

We take nothing for granted. Uncertainty is never good for business, but we feel that healthcare services is an industry that offers shelter from the storm. At American HealthCare Capital, we are helping our clients to analyze current market conditions and offering advice to help them make the most of a potentially challenging situation. We’ve been around long enough to have seen plenty of ups and downs in the market. There will certainly be winners and losers to come out of the latest episode, but to us it’s just “business as usual during alterations.” 

If the bad news is that healthcare providers need liquidity in credit markets in order to stay in business, then the good news is that credit markets need qualified borrowers like healthcare providers in order to stay in business. The healthcare services industry has proven to be one of the most reliable segments of the economy. Unlike in the dot-com and subprime mortgage bubbles, the healthcare services industry has experienced sustained and steady growth due to rock-solid market fundamentals: an aging population needs effective care no matter what happens in the economy. As responsible financial institutions look for promising places to invest capital, the healthcare services industry continues to look like a relatively safe bet.

To date, we have not experienced a single buyer terminating a transaction due to an inability to secure financing. To the contrary, buyers have reassured us that their lenders are as eager as ever to consummate good transactions. Also, we continue to get inquiries from growing companies looking for strategic acquisitions and from private equity investors who are looking for a way to enter this thriving market.

One way to keep apprised of all this activity is to join our mailing list. We announce all new listings via email as they become active. We don’t send annoying junk-mail, contrived newsletters or canned statistics- just announcements of new listings to make both buyers and sellers aware of what is available in the marketplace.  ...and we would never even consider selling or sharing your contact information with any third party. To get on the list, click here.