After a 2023 slump, health care dealmakers are voicing optimism for a 2024 rebound.
Transaction volume declined in the hospice and home-based care space in 2023, following the two record-breaking prior years. Only three hospice deals took place in the third quarter of this year compared to 11 in Q3 2022 and 18 in the same period in 2021, according to data from the M&A advisory firm The Braff Group.
But projections from Braff and PriceWaterhouseCoopers (PwC) could signal an upward trend in the new year.
“Our outlook for 2024 health services deals is cautiously optimistic. While general apprehension from all parties involved in the deal cycle continues, corporate and private equity (PE) players alike continue to hold large levels of capital that need to be deployed,” PwC indicated in a report. “Corporate entities recognize the importance of business reinvention and portfolio transformation to achieve growth and profit expectations, with M&A seen as a leading way to drive these changes.”
A range of factors contributed to 2023’s M&A decline, including rising interest rates and inflation, intensive regulatory activity, macroeconomic issues and gaps between sellers’ valuations and the amounts that buyers were willing to pay.
Also, after the flurry of deals that came in 2021 and 2022, many companies took the year to focus on integration and value creation for their newly acquired assets.
Dominating the market in 2023 are massive outlier deals, including some involving payers or other large health care companies. This includes the $5.4 billion purchase of LHC Group by the UnitedHealth Group (NYSE: UNH) subsidiary Optum Health, and that same company’s recent acquisition of Amedisys (NASDAQ: AMED).
Also of interest to the home-based care space is the sale of Signify Health (NYSE: SGFY) to CVS Health (NYSE: CVS) for $8 billion.
But next year, the pendulum could start swinging in the other direction, according to The Braff Group.
“There are lots of reasons to be optimistic about 2024. The fundamental reasons why buyers have targeted health care remains the same,” the firm indicated in a report shared with Hospice News. “The Fed is likely nearing the end of its near uninterrupted string of rate cuts. Institutional loan volume is approaching pre-pandemic levels, and some strategic buyers can use cash or legacy credit at lower costs of capital to fund deals.”
In addition, private equity firms are sitting on more than $800 billion in dry powder, according to Braff.
The close of the years also saw some earnings stabilization among publicly traded companies. Most of the major public hospice companies saw revenue increase year-over-year and sequentially during 2023, with one or two outliers.
Trends like these are often solid indicators that M&A might pick back up, according to PwC.
“There are indications of an earnings recovery in the fourth quarter of 2023, led by earnings growth outside of rate-sensitive and commodities-driven sectors,” PwC indicated in its report. “Our estimates for 2024 see that recovery continuing, which could herald more dealmaking. Valuation gaps between sellers and buyers also seem to be closing for all but the largest deals, providing another reason for optimism that dealmaking could pick up in 2024.”
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