In a period of consolidation within any market or sector, there will inevitably be a dramatic evolution of trends related to transaction rationale, deal structures and valuation trends. With the rise in consolidation and transaction activity amongst healthcare provider organizations, such as hospitals, health systems, medical groups and ancillary provider entities, we have undoubtedly witnessed a time of significant evolution within this space. And with the added factor of a major recession within the broader markets, the fluctuation of valuations in healthcare deals have indeed been interesting, to say the least.
For the past three to five years, “clinical integration” has become top of mind for executives in both hospital administration and medical group leadership, and this refers to the growing trend of alignment between medical groups and health systems. Now that we have observed a few years of clinical integration, we have been able to compile enough data that allows us to take a deeper look at some of the intricacies of these deals, the structure of the transactions and the deal values that are being paid.
In looking at all healthcare facility deals – including hospitals / health systems, medical groups and ancillary entities, such as surgery centers, imaging centers, etc – from 2009, 2010 and the first half of 2011, there has been a marked increase in practically all of the data points that we typically consider. While the median deal value in 2009 was $12.5 million, it increased to $24.85 million in 2010, and in the first half of 2011, we have already seen this figure increase to $35 million.
The size of the entities being acquired has also increased over this time period. In 2009, the median size of healthcare facilities purchased (measured by revenue) was approximately $49 million with EBITDA of $4.26 million. These figures increased in 2010 to median revenue of $60 million and median EBITDA of $23.25 million. And so far in 2011, the median revenue of targeted healthcare entities has increased to almost $85 million; however, the median EBITDA figure has decreased to $5 million. We don’t read too far into the decline in median EBITDA, due to the fact that we are only dealing with two quarters of data, and because 2010 included a number of very large transactions involving publicly-traded companies with greater earnings; therefore, this influenced the figures somewhat, in addition to considering the simple fact that more data was made available since the deals involved public companies.
The most relevant measures of transaction values, however, are measured in the form of multiples, i.e., the transaction value and/or enterprise value as a multiple of revenue and EBITDA. Median revenue multiples have remained relatively stable since 2009, hovering around 0.97x to 0.99x revenue. Conversely, EBITDA multiples have increased, with a major jump in 2010 where we saw median multiples grow from 1.35x to 7.52x. And in the first half of 2011, the median EBITDA multiple for healthcare facility deals increased to 8.49x.
These trends tell us a number of things about the evolution of healthcare facility transactions throughout this period of historical consolidation. In 2009, there were approximately 200 M&A transactions among hospitals / health systems, medical groups and/or ancillary facilities (not including long-term care facilities). This volume decreased in 2010 to 178 deals. However, within the first six months of 2011, we have already seen approximately 200 healthcare facility deals. Breaking that down, there have been nearly 70 medical group transactions that we have measured, though, there have likely been many more unrecorded deals in this category. Further, there have been approximately 57 deals involving hospitals and/or health systems that have closed and a number of more that have been announced. And finally, we have recorded over 70 transactions involving ancillary service centers.
We can also see from this data that the size of the entities doing deals is growing, which leads us to a couple of other conclusions. First, we are moving beyond a period of just distressed deals. If the deal values, target sizes and multiples were steadily decreasing year over year, this would lead us to believe that buyers are doing more distressed deals; however, this is not the case. When you look at the deals taking place, we are seeing hospitals align to form stronger health systems, medical groups are aligning with hospitals and health systems are seeking ancillary / outpatient facilities that they can integrate within their existing service models. And the other important trend this shows us is that both capital and cash are coming back into the marketplace, as lenders are becoming more bullish about injecting capital into deals involving stable healthcare facilities and strategic buyers have stabilized themselves with enough cash to make larger investments without having to over-leverage their organizations with excessive debt.
And finally, another takeaway from these trends is that values and multiples are increasing. This means that buyers – both strategic and financial – are paying more to successfully acquire their targets. From this we can gleam a number of other factors, including the fact that the deal landscape is becoming more competitive with the influx of buyers; and, the previous trends about greater amounts of cash available is positively influencing the quality of deals that buyers are pursuing.
Much of today’s consolidation within the industry is centered around health systems preparing themselves for the Accountable Care Organization, which means they need to become more integrated with a larger and much more diversified service base. While we still are not completely sure what the ACO will ultimately look like, we have already seen a significant impact on transaction volume and values amongst healthcare facilities.
Further analysis on healthcare facility transaction valuations will be released in an upcoming special report from Coker in the summer of 2011. Contact us to receive the full report when it is published.