Demographic growth and the availability of capital are among a handful of forces driving a robust mergers and acquisitions market in the hospice space, motivating companies to make acquisitions at a relatively brisk pace.
From 2016 to 2018, the hospice M&A space saw more than 10 transactions of $250 million or more in total enterprise value, according to the health care-focused investment firm Cain Brothers and Company, LLC.
The market continued to flourish in 2019, even displaying an uptick during its first three quarters. Fourteen hospice transactions occurred during Q2 of 2019, up from eight in Q1, according to a report from M&A advisory firm Mertz-Taggart. And last summer, auditing and consulting firm PwC reported that for the third quarter in a row, hospice companies have seen the highest multiples of any health care sector in M&A transactions, reaching 22.7x in the second quarter of 2019.
But as a vigorous year draws to a close, the question of continued growth in a resurgent M&A market remains. Specifically, will the current high valuations and market strength continue into next year?
Benjamin Bogan, partner at Stoneridge Partners in Louisville, Kent., expressed confidence going into next year. “There has been no evidence of a slowdown in interest either by strategics or financial investors in the space, driven by the aging U.S. population, the increased demand and need for these services, and the associated cost of these services compared with other end-of-life care options, he said. “I anticipate this market will stay hot for 2020 and beyond.”
Bogan isn’t alone in his opinion that current conditions support ongoing hearty valuations development in the coming year.
“The hospice M&A market is as hot as it’s ever been,” said Cory Mertz, managing partner at Mertz Taggart. “The public home care companies are all trading at or near all-time highs in terms of multiples of EBITDA. Private equity is sitting on record amounts of cash and looking for opportunities.”
Mark Kulik, managing director of The Braff Group, also said feels record high valuations and multiples will not diminish. “Current conditions, including continued buyer demand, low interest rates, growing hospice demand and a shrinking pool of available mid-to-large size quality hospice agencies, will sustain hospice valuations at the highest levels.”
However, these experts temper their optimism with a note of caution.
“It should not go unnoticed that we only have public access to a small handful of deals as many are not reported or specific; reliable valuation information is not shared. In addition to not having knowledge of or access to unreported deals and their associated valuations,” Bogan said. “There is also no sense of or quantifiable numbers on deals that fall through.”
Though generally positive, Mertz nevertheless said he beliefs the uptick in M&A valuations has ended. “We’ve either plateaued or peaked. I don’t expect valuations to continue to increase. But we won’t know for sure until things start to fall,” he said.
One wild card for M&A in the coming year will be the impact of the Medicare Advantage hospice carve-in, currently slated to take effect Jan. 1, 2021.
“It is hard to know with any certainty what impact, if any, there will be in the long term,” Bogan said. “But I predict that there will no impact, either positive or negative, on M&A activity during 2020.”
Mertz was sure that the carve-in will definitely impact 2020 due to uncertainty. “How much penetration do we expect and how quickly? What will rates look like? From a buyer’s perspective, uncertainty equals risk, and valuations go up and down based on the perceived risk that cash flow may change for the negative.
Kulik predicted “a very quiet 2020” preceding the start of the pending CMS program. “We’ll begin to see some conversations and dialogue in 2020 only. There’ll be no data available — just more dialogue and questions.”
“Overall, hospice has touched almost everyone in America in a positive way,” he said. “With continued pressure on the federal budget, hospice is in a good position due to the fact it continues to deliver highly competitive and compensated care while still being a fiscally favorable option.”
Written by Robert Porche