Geographic location and the ability to co-locate new hospice operations with personal care or home health assets are key factors in how Addus HomeCare Corp. (NASDAQ: ADUS) makes merger and acquisition decisions. These considerations have become even more important as multiples in the hospice space continue to rise.
Multiples in the hospice and home care space reached a record 26x, according to a research report by PwC’s Health Research Institute. Hospice and home health merger and acquisition activity buoyed the larger health care services sector last year, which saw a decline in transactions largely due to the fallout from the COVID-19 pandemic. Overall health care sector multiples hovered near 13.9x, up slightly from 13.8x the prior year, according to PwC.
Addus may be less likely to pursue a hospice deal with a high price tag if the company wasn’t immediately able to co-locate with its other business lines.
“As it relates to the hospice side, we’ve all had to pay higher rates,” said Addus CEO Dirk Allison at the Raymond James Institutional Investors Conference. “If we were looking at a hospice deal in a market where we didn’t have personal care … we would probably look at the multiple we could pay differently.”
Despite the high valuations, Addus is not foregoing hospice transactions even as they strive to remain judicious in M&A spending decisions. The company is actively pursuing additional hospice acquisitions in early 2021 even as it works to integrate its recent Queen City Hospice purchase in Ohio.
In December 2020, the company bought Queen City and its affiliate Miracle City Hospice the private equity firm Stonehenge Partners for a cash purchase price of $192.0 million, one of the larger hospice acquisitions to occur last year.
Also in December, Addus acquired personal care provider SunLife HomeCare in Tucson, Ariz., for an undisclosed amount. During 2019 and 2020, acquired companies have brought in more than a total $214 million for Addus.
The Queen City acquisition is a case in point for how Addus evaluates multiples. The company has a large personal care presence in Queen City’s home state of Ohio and recently obtained a home health license in that state, completing the “third leg of the stool,” according to Allison.
“We’re a very large personal care provider in Ohio. We did pay more for Queen City, maybe more than we would have paid for a hospice deal years ago or a hospice deal that wasn’t in one of our personal care states,” Allison said. “But it allowed us to add the second leg of the stool in Ohio.”
Addus provides hospice, home health, and personal care services to nearly 44,000 patients through 215 locations in 25 states. The company’s acquisition strategy hinges largely on building density in markets where it already has a presence, though plans exist to move into new states as opportunities arise.
The company’s full-year net service revenues for 2020 rose 17.9% to $764.8 million from $648.8 million for 2019. Fourth quarter hospice revenues topped $27.5 million, up from $26.4 million in the prior year’s quarter.