Lately the “L” seems to be missing from LBO’s (leverage buy-outs) as a result of the lack of leverage over the past few years. However the slower mergers & acquisitions activity in the healthcare market first seen in late 2008 has recently improved, undoubtedly partially driven by the renewed health of senior debt lending to support transactions.
During the first three quarters of 2010, buyers completed or announced 325 transactions in the healthcare market compared to 265 during the same period last year. Healthcare transactions valued less than $.5B which closed or were announced within that three-quarter period of 2010 totaled $18.8B compared to the closing of just $10.6B for the comparable period of 2009 and $18.9B for all of 2009. In addition to the expected year-end transaction pickup driven by tax planning, several forces are at work in the marketplace that leads us to believe that this trend will continue.
Quarterly Healthcare M&A Statistics 2010
Source: Capital IQ
Compared to the last few years, deals in most industry sectors including the health care market, are now being bolstered by increases in leverage. The amount of leverage available has varied according to the assets available and the quality of the performance of the company. While leverage in transactions is returning to a higher level, it is nowhere near the levels that preceded the recession. The publication Mergers & Acquisition recently reported that across industries middle-market deals are realizing between 2.75 times and 3 times senior debt and 1 to 1.5 times mezzanine debt.
Higher equity contribution levels are still the driving force behind many of today’s transaction activity. Equity contributions in the 40-45% range are common in the middle market. However, significantly higher levels of equity are still occurring in many cases where the buyer or seller wants certainty for a quick close. The sale of healthcare products provider Covidian’s specialty chemicals division to the private equity group New Mountain Capital for $280MM was done completely with equity. Deals that are primarily – or entirely – based on equity provide unique opportunities for buyers to set themselves apart from others involving sellers offering fewer contingencies and quicker transaction closings.
While many speculate that the recent increased availability of credit to the deal marketplace is driving healthcare industry M&A activity, it is also believed the passage of health care reform is another catalyst. The hospital marketplace is one area that has seen significant pick up in recent mergers and acquisitions. Since the mid-March passage of reform, 28 deals involving 57 hospitals have been announced, representing a combined total of $3.3B. This compares to just five hospital deals reporting a combined purchase price of $94MM in early 2010.
While many of those 28 hospital deals will certainly be done with leverage, equity checks continue to influence this part of the M&A market. One of the larger recently announced deals, Health Management Associates’ (NYSE: HMA) $145MM purchase of Florida-based Wuesthoff Health Systems, will be funded primarily with cash. If the increased availability of credit is not the catalyst behind a transaction, the anticipated easier access to credit accompanying the expanded hospital system is certainly among the issues pressing many hospitals to sell or consolidate. This is a trend that was underscored in 2009 when almost 81% of hospital sale transactions involved a target that was a single facility.
Another M&A byproduct of the passage of federal healthcare reform is the anticipated rush to consolidate health care information technology system providers. The federal mandate to automate the collection and distribution of patient medical records and information has IT healthcare providers scrambling to acquire and assemble missing components or unique pieces that will differentiate their systems in the marketplace.
Finally, if the return of leverage and the anticipated healthcare system reforms which are being federally mandated are not enough to increase M&A activity among strategic buyers one should look to the interest in the healthcare sector by financial buyers. Consider that as little as five years ago limited private equity groups positioned themselves as healthcare specialists focused on this industry. Today a screen of PE firms interested in healthcare companies and actively pursuing investment or acquisition in this market exceeds 900 listings.
All of these factors are creating an environment conducive to continued growth in M&A and corporate finance transactions for the healthcare marketplace. Healthcare industry business owners must prepare for increased competition and changes to their marketplace that normally occur in periods of consolidation.