Download - M&A in California
M&A in M&A in CaliforniaCalifornia
ORORWhere Have All the Buyers Where Have All the Buyers
Gone?Gone?
Eric Tuckman, Eric Tuckman, President President
Advisory Health Management GroupAdvisory Health Management Group
Hospital Acquisition Hospital Acquisition EnvironmentEnvironment Recent History – California viewed Recent History – California viewed
as “challenging”/unfavorable marketas “challenging”/unfavorable market Difficult regulatory environmentDifficult regulatory environment Union penetrationUnion penetration Excessive construction costsExcessive construction costs Seismic compliance/uncertaintySeismic compliance/uncertainty Significant managed care penetrationSignificant managed care penetration
11
30% < California Connecticut District of Columbia
Hawaii Massachusetts
25% to 30% Colorado Florida Maine Maryland Michigan Minnesota
Nevada New Jersey Pennsylvania Rhode Island Wisconsin
20% to 25% Indiana Missouri New Hampshire New Mexico
New York Utah Virginia
15% to 20% Arizona Georgia Illinois Kansas
Ohio Oregon Vermont Washington
10% to 15% Delaware Iowa Kentucky Louisiana
North Carolina Tennessee Texas
10% > Alabama Alaska Arkansas Idaho Mississippi Montana Nebraska
North Dakota Oklahoma South Carolina South Dakota West Virginia Wyoming
HI
NJ
MDDE
DC
CT
VA
MA
NY
NC
SC
VT
LA
TN
IN
MI
IL
AR
TX
ID
AL
AZ
CA CO
GA
IA
KS
KY
ME
MN
MS
MO
MT
NE
NM
ND
OH
OR
SD
UT
WA
WV
WI
PA
OK
NJ
MDDE
DC
CT
VA
MA
NY
VT
NH
LA
TN
IL
AR
TX
AL
AZ
CO
FL
IA
KS
KY
ME
MN
MS
MO
MT
NENV
NM
ND
WV
WIWY
PA
OK
AK
RI
Provider OverviewManaged Care Penetration
____________________
Source: Competitive Edge Reports, HealthLeaders-2005
Atmosphere Beginning to Atmosphere Beginning to ChangeChange Health care reform likely Health care reform likely
(uninsured/bad debt solution)(uninsured/bad debt solution) Seismic relief Seismic relief Managed care parityManaged care parity Demographics favorableDemographics favorable
Bottom line – top-line Bottom line – top-line growth possible; expense growth possible; expense
side within normsside within norms
4
Growth in Total Population expected by 2015
1.5% < Arizona Florida
Nevada Texas
1.0% to 1.5% Alaska California Delaware Georgia Idaho Maryland
New Hampshire North Carolina Oregon Utah Virginia Washington
0.5% to 1.0% Arkansas Colorado Hawaii Maine Minnesota Missouri Montana
New Jersey New Mexico South Carolina Tennessee Vermont Wisconsin
0% to 0.5% Alabama Connecticut Illinois Indiana Iowa Kansas Kentucky Louisiana Massachusetts Michigan
Mississippi Nebraska New York Ohio Oklahoma Pennsylvania Rhode Island South Dakota West Virginia Wyoming
0% > District of Columbia North Dakota
Demographic Overview
HI
NJ
MDDE
DC
CT
VA
MA
NY
NC
SC
VT
LA
TN
IN
MI
IL
AR
TX
ID
AL
AZ
CA CO
GA
IA
KS
KY
ME
MN
MS
MO
MT
NE
NM
ND
OH
OR
SD
UT
WA
WV
WI
PA
OK
NJ
MDDE
DC
CT
VA
MA
NY
VT
NH
LA
TN
IL
AR
TX
AL
AZ
CO
FL
IA
KS
KY
ME
MN
MS
MO
MT
NENV
NM
ND
WV
WIWY
PA
OK
AK
RI
____________________Source: U.S. Census Bureau, Population Division, Population Projections Branch.
5
Demographic OverviewGrowth in Population of age 65 and over expected by 2015
3.5% < Alaska Arizona
New Mexico Nevada
2.5% to 3.5% California Colorado Delaware Florida Georgia Hawaii Idaho Maine Maryland Montana New Hampshire
North Carolina Oregon South Carolina Tennessee Texas Utah Vermont Virginia Washington Wyoming
1.5% to 2.5% Alabama Arkansas Connecticut Illinois Indiana Kansas Kentucky Louisiana Massachusetts Michigan Minnesota
Mississippi Missouri Nebraska New Jersey New York Ohio Oklahoma Rhode Island South Dakota West Virginia Wisconsin
1.5% > District of Columbia Iowa
North Dakota Pennsylvania
____________________Source: U.S. Census Bureau, Population Division, Population Projections Branch.
HI
NJ
MDDE
DC
CT
VA
MA
NY
NC
SC
VT
LA
TN
IN
MI
IL
AR
TX
ID
AL
AZ
CA CO
GA
IA
KS
KY
ME
MN
MS
MO
MT
NE
NM
ND
OH
OR
SD
UT
WA
WV
WI
PA
OK
NJ
MDDE
DC
CT
VA
MA
NY
VT
NH
LA
TN
IL
AR
TX
ID
AL
AZ
CO
FL
IA
KS
KY
ME
MN
MS
MO
NENV
ND
UT
WV
WIWY
PA
OK
AK
RI
10
Provider Summary
0.6 < Alabama Arkansas District of Columbia Florida Louisiana
Mississippi Nevada Tennessee Texas West Virginia
0.4 to 0.6 Arizona Colorado Georgia Kansas Kentucky Missouri
New Mexico Oklahoma South Carolina Utah Virginia Wyoming
0.1 to 0.3 Alaska California Idaho Illinois Indiana Maine Maryland Massachusetts Nebraska
New Hampshire New Jersey North Carolina Oregon Pennsylvania South Dakota Washington Wisconsin
0.1 > Connecticut Michigan
New York Ohio
No Data Available/NSD
Delaware Hawaii Iowa Minnesota
Montana North Dakota Rhode Island Vermont
Concentration of For-Profit Beds
HI
NJ
MDDE
DC
CT
VA
MA
NY
NC
SC
VT
LA
TN
IN
MI
IL
AR
TX
ID
AL
AZ
CA CO
GA
IA
KS
KY
ME
MN
MS
MO
MT
NE
NM
ND
OH
OR
SD
UT
WA
WV
WI
PA
OK
NJ
MDDE
DC
CT
VA
MA
NY
VT
NH
LA
TN
IL
AR
TX
AL
AZ
CO
FL
IA
KS
KY
ME
MN
MS
MO
MT
NENV
NM
ND
WV
WIWY
PA
OK
AK
RI
____________________Source: Kaiser Henry J Foundation 2004
Buyers on the HorizonBuyers on the Horizon Financial BuyersFinancial Buyers – Hospital sector viewed as – Hospital sector viewed as
attractive mid- to long-termattractive mid- to long-term Distressed debt/restructuring firms see upside in Distressed debt/restructuring firms see upside in
recent depressed operating performancerecent depressed operating performance Start-upsStart-ups Physician-owned/managed entitiesPhysician-owned/managed entities Syndication opportunitiesSyndication opportunities
Strategic BuyersStrategic Buyers – Opportunity to add to – Opportunity to add to network quicklynetwork quickly Buy vs. build makes economic sense Buy vs. build makes economic sense Implementation of new operating strategyImplementation of new operating strategy Managed care play – instantaneous net revenue fixManaged care play – instantaneous net revenue fix
ValuationValuation California hospital values generally below California hospital values generally below
national normsnational norms EBITDA/net revenue multiplesEBITDA/net revenue multiples Comps often not correctComps often not correct Bankers generally have same data so valuationBankers generally have same data so valuation
metrics are similarmetrics are similar Sophisticated buyers (financial and strategic) Sophisticated buyers (financial and strategic)
normally use DCF modelnormally use DCF model Generally, cannot financially justify a deal Generally, cannot financially justify a deal
for defensive purposesfor defensive purposes Real estate value has driven many recent dealsReal estate value has driven many recent deals
Metrics Used by Investment Metrics Used by Investment BankersBankersDateDate AcquirerAcquirer StatStat
eeTargetTarget PurchasPurchas
e Pricee Price
($ ($ millions)millions)
RevenueRevenue
($ ($ millions)millions)
BedBedss
EDITDAEDITDA
($ ($ millions)millions)
PurchaPurchase se
Price to Price to RevenuRevenu
ee
PurchaPurchase se
Price to Price to BedsBeds
PurchaPurchase se
Price to Price to EDITDEDITD
AA
6/15/06/15/077
Community Community Health Health SystemsSystems
WAWA Empire Health Empire Health ServicesServices
N/DN/D 255.0255.0 363363 N/AN/A N/AN/A N/AN/A N/AN/A
6/12/06/12/077
Catholic Catholic Health EastHealth East
NJNJ Two Cathedral Two Cathedral Healthcare Healthcare HospitalsHospitals
N/DN/D 241.3241.3 326326 6.36.3 N/AN/A N/AN/A N/AN/A
6/4/076/4/07 Wellmont Wellmont Health Health SystemSystem
VAVA Two Virginia Two Virginia HospitalsHospitals
70.070.0 66.566.5 213213 8.08.0 0.95x0.95x 0.33x0.33x 8.75x8.75x
6/2/076/2/07 Triumph Triumph HealthcareHealthcare
TXTX Memorial Memorial Hermann LTAC Hermann LTAC OperationsOperations
N/DN/D N/AN/A 201201 N/AN/A N/AN/A N/AN/A N/AN/A
5/25/05/25/077
AHMC, IncAHMC, Inc CACA San Gabriel Valley San Gabriel Valley Medical CenterMedical Center
N/DN/D 105.5105.5 231231 N/AN/A N/AN/A N/AN/A N/AN/A
5/16/05/16/077
Beaumont Beaumont HospitalsHospitals
MIMI Bon Secours Bon Secours HospitalHospital
N/DN/D 138.0138.0 221221 N/AN/A N/AN/A N/AN/A N/AN/A
5/9/075/9/07 Iasis Iasis HealthcareHealthcare
TXTX Alliance HospitalAlliance Hospital 65.565.5 44.744.7 5050 12.812.8 0.68x0.68x 1.31x1.31x 5.12x5.12x
5/9/075/9/07 Wellmont Wellmont Health Health SystemSystem
KYKY Jenkins Jenkins Community Community HospitalHospital
N/DN/D 8.28.2 6060 0.50.5 N/AN/A N/AN/A N/AN/A
5/6/075/6/07 Henry Ford Henry Ford Health Health SystemSystem
MIMI Cottage HospitalCottage Hospital N/DN/D 55.655.6 7979 6.96.9 N/AN/A N/AN/A N/AN/A
Tenet Divestitures – Before Tenet Divestitures – Before and Afterand After20022002
140 hospitals nationwide140 hospitals nationwide 40 California hospitals40 California hospitals
20032003 Outlier “problem”/Redding Outlier “problem”/Redding
controversy/Alvarado litigationcontroversy/Alvarado litigation Business strategy no longer viableBusiness strategy no longer viable Nameplate damagedNameplate damaged California viewed as the locus of the California viewed as the locus of the
problemsproblems Short-term operating upside evaluated Short-term operating upside evaluated
as high-risk/non-existentas high-risk/non-existent
Tenet California DivestitureTenet California Divestiture
Largest single-Largest single-market divestiture market divestiture in historyin history
Only one of 21 Only one of 21 hospitals with hospitals with positive cash flow positive cash flow
Public Public commitment made commitment made to preserve to preserve hospitalshospitals
Tenet Healthcare says it will sell 27 hospitalsWednesday, January 28, 2004 Los Angeles – Tenet Healthcare, the hospital chain that grew through aggressive acquisitions before becoming mired in federal investigations, is planning to sell more than a quarter of its hospitals in an effort to reverse its declining fortunes.
Tenet, which is based in Santa Barbara, will announce today that it intends to sell 27 hospitals, leaving it with only 69 in 13 states, its chief executive, Trevor Fetter, said.
Among those to be sold are 19 in California, accounting for more than half of the hospitals it owns in the state.
Tenet California DivestitureTenet California Divestiture
Factors driving the divestiture Factors driving the divestiture decisiondecision
Significant seismic estimatesSignificant seismic estimates Union agreements/successor Union agreements/successor
clauses/organizing rightsclauses/organizing rights Large complement of DSH HospitalsLarge complement of DSH Hospitals Compliance/Fraud and Abuse overhangCompliance/Fraud and Abuse overhang
Prosecution status unclearProsecution status unclear Unwinding of physician arrangements Unwinding of physician arrangements Alvarado Hospital trial distractionAlvarado Hospital trial distractionMargins simply better outside of Margins simply better outside of CaliforniaCalifornia
The ProcessThe Process Investment bankers utilized but process Investment bankers utilized but process
managed and directed at the market levelmanaged and directed at the market level Summary facility profiles developed – formal Summary facility profiles developed – formal
traditional descriptive memorandums not traditional descriptive memorandums not utilizedutilized
Defined sales criteria – no real estate buyers Defined sales criteria – no real estate buyers or non-industry outsidersor non-industry outsiders
Large deposit requiredLarge deposit required Standardized transaction agreements (asset Standardized transaction agreements (asset
purchase structures) utilizedpurchase structures) utilized Experienced legal counsel mandatedExperienced legal counsel mandated
Sale Solicitation StrategySale Solicitation Strategy
No national systems interestedNo national systems interested Limited interest from private Limited interest from private
equity/hedge fundsequity/hedge funds Offered as donation to major Offered as donation to major
nonprofit nonprofit systems – offer declinedsystems – offer declined
Cultivated local buyersCultivated local buyers Avoid political battlesAvoid political battles
And the Winners Are…And the Winners Are…
Predominately Predominately physician-owned/managed physician-owned/managed organizationsorganizations
Most utilized some form of whole-Most utilized some form of whole-hospital physician syndicationhospital physician syndication
Almost all utilized financing secured Almost all utilized financing secured by real estate by real estate
Final results … still being tabulatedFinal results … still being tabulated
California Nonprofit California Nonprofit ConversionsConversions Extensive regulatory review processExtensive regulatory review process Broad discretion given to AG Broad discretion given to AG Essentially political/administrative Essentially political/administrative
process determined by philosophy of process determined by philosophy of sitting AG sitting AG
Experienced advisors crucialExperienced advisors crucial Ability to control/use net proceeds of sale Ability to control/use net proceeds of sale
(application of traditional charitable trust (application of traditional charitable trust doctrines)doctrines)
Health planning “light”Health planning “light”
Predictions for the Predictions for the FutureFuture1.1. Hospital acquisition activity is cyclicalHospital acquisition activity is cyclical
Parallels operating/reimbursement cyclesParallels operating/reimbursement cycles2.2. Large systems performing strategic Large systems performing strategic
assessmentsassessmentsof existing portfoliosof existing portfolios
Effective capital deployment vs missionEffective capital deployment vs mission
3.3. FEMA grants now fully spentFEMA grants now fully spent Access to necessary capital will be more difficultAccess to necessary capital will be more difficult
4.4. Cost of construction in California not likely Cost of construction in California not likely to decrease significantlyto decrease significantly
5.5. Passage of health care reform will improve Passage of health care reform will improve valuationsvaluations
Proposed seismic reclassification will make Proposed seismic reclassification will make certain assets more attractivecertain assets more attractive
Thank YouThank You
Eric Tuckman, Eric Tuckman, President President
Advisory Health Advisory Health Management GroupManagement Group