SPACs Build Momentum in Hospice M&A Market

Rising interest from special-purpose acquisition companies (SPACs) could make competition in an already active hospice M&A market more fierce in coming years. Like private equity and other investors, SPACs are drawn to hospice by surging demographic tailwinds from the aging population. 

SPACs are formed with the sole intent of raising capital for the purpose of acquiring an existing organization. Without business operations in place, SPACs are commonly referred to as “blank-check companies,” and raise funds through initial public offerings. The private companies SPACs acquire in turn become public as well.

Roughly 250 SPACs have formed in recent years, with 18 more expressing investment interest in health care, according to Mark Kulik, managing director of M&A advisory firm The Braff Group. Kulik told Hospice News that rising SPAC interest in health care is a “fairly new phenomenon” based on the last 10 to 20 years of widespread market investment trends, with home health and hospice care as seemingly “logical routes” for these companies to gain a foothold.

“Theoretically these are 18 publicly-established and declared, well-funded health care companies looking to buy what might be a home health or hospice company,” Kulik told Hospice News. “With larger hospice companies doing phenomenally well and growing to certain sizes where they are able to go public — that’s where the conversations with SPACs would start to begin.”

More health care groups are anticipated to go public through mergers with SPACs. Both initial public offerings and M&A deals are anticipated to reach new heights in the health care sector in 2021, according to projections from CB Insights.

Merger and acquisition activity continues to heat up in the hospice space despite record-high price tags for acquisitions. Hospice and home care sector multiples have reached record highs in recent years, with a recent report reflecting amounts reaching upwards of 29x in 2020 and beating 2019’s record high of 26x, according to PwC’s Health Research Institute. Acquisition activity in both sectors has outpaced other health care markets.

SPACs are joining private equity firms as growing entities in the hospice space. The number of private equity hospice deals reached an all-time high last year. Private equity hospice transactions rose nearly 25% from 2011 to 2020, according to a report from The Braff Group.

SPACs interest in hospice has been increasing in part from the positive growth trajectories of large public hospice companies such as Amedisys (NASDAQ: AMED), LHC Group (NASDAQ: LHCG) and The Pennant Group (NASDAQ: PNTG). These “ultimate consolidators” are where interest in hospice has started to gain increasing traction, according to Cory Metz, managing partner of M&A advisory firm, Mertz Taggart.

“Interest in hospice really starts with the public hospice companies. Currently the trading multiples for the public companies are in the 25x – 35x range, versus private companies that will typically trade in the 5x – 15x range,” Mertz told Hospice News. “This gives the public companies the ability to pay above market for deals, and for those deals to be immediately accretive.”

Mertz also cited industry tailwinds due to the growing senior population may also be driving SPACs interest in hospice.

The U.S. Census Bureau projected in 2017 that 77 million people across the country will be 65 year or older by 2034, or 1 in every 5 people. This population will substantially increase demand for serious illness and end-of-life care, contributing to a strong growth trajectory for the hospice market. Hospice utilization has been on an upswing among Medicare decedents, climbing above 50% during 2018, the highest rate since the 1983 inception of the Medicare Hospice Benefit, according to research from Excel Health.

“There are not many investments where it’s guaranteed the numbers are going to grow,” said Kulik. “But with hospice, the number of potential users is going to grow. There are real drivers to the demand and to the size of the hospice marketplace going forward.”

Another potential side effect of swelling SPAC activity is that more private home-based care companies may consider pursuing public listings. These companies have shown promise in terms of raising capital and unlocking some of the depressed value that assets have experienced due to private equity trading, according to Ben Hanson, chief operating officer, Texas-based EQ Health Acquisition Corp. (NYSE: EQHA).

“That’s the value that SPACs like ours are trying to unlock,” Hanson said. “Value is going to be based around what qualitative things we bring to our partner company to maximize shareholder value and align our vision and values on patient quality and to be on the right side of the cost equation.”