M&A Activity Report Q4 2019

17 Jan


M&A Activity Report Q4 2019

2019: 85 Announced Change of Control Transactions

2019 Announced Change of Control Transactions

  • Full year 2019 announced transactions totaled 85 transactions, which is the second lowest annual total since 2009 and represents more than a 25% decline in announced transactions from 2018’s total of 116. Although a marked decline from prior year’s activity, the total compares similarly to that of 2016 (85 announced transactions), 2014 (93) and 2010 (88)
  • Publicly-traded for profit health systems continued the trend of decreased acquisitions, as HCA announced two acquisitions and CHS announced one (albeit repurchased in Curae Health’s bankruptcy proceedings and immediately held for sale)
  • For the full year 2019, California recorded eight announced transactions, followed by Pennsylvania with six

2019 M&A Themes

#1 Overall announced acute care hospital transactions slowed in 2019

  • Volume of transactions in 2019 was down 27% from 2018; down 17% from 10-year average
  • Reduced pace of for-profit divestitures after frenetic sell-off in 2018 and 2017
  • As in prior cycles, a “natural pause” following a heightened period of acquisitions for integration

#2 Overall for-profit acquisition activity remains meaningfully down

  • 2019 recorded 18 transactions that involved a for-profit acquirer, supplanting 2018’s total of 20 as the lowest volume of for-profit acquisitions for the preceding ten years and represents a significant decrease from the average of nearly 30 annual for-profit acquisitions over this time period
  • Notable absence of publicly-traded hospital operator acquisitions
    • HCA only buyer past two years; all others have been divesting to reposition portfolio, de-lever or integrate major past transactions

#3 Decline in mega mergers and reduced activity among healthy independent systems

  • 10 mega mergers (>$1 billion revenue target) in each of the past two years; only four in 2019
  • The number of transactions where the target was a large independent hospital or small system (revenue ranging from $250 million – $750 million) declined by nearly 50% in 2019 compared to 2018
  • Drivers of consolidation and active dialogue remains the same; the reduced activity is indicative of a shift to more thoughtful and methodical assessments of strategic options by healthier organizations
  • Although the volume of these transactions declined in 2019, the pipeline of healthy systems in partnership discussions remains robust and gained traction in Q4 2019

#4 Mergers called off

  • Acquirers are becoming more selective with heightened scrutiny during the diligence period
  • From mega mergers to critical access hospital acquisitions, several potential mergers were called off post-LOI in 2019 which is another contributing factor to the reduced announced transactions total for the year; examples include:
    • Sanford, UnityPoint
    • LifeSpan, Care New England
    • Baylor Scott & White Health, Memorial Hermann Health System
    • Marshfield Clinic Health System, Gundersen Health System
    • Palos Health, Loyola Medicine
    • Iroquois Memorial Hospital, Riverside Healthcare
    • Community Hospital (Grand Junction, CO), Centura Health
    • Day Kimball Hospital, Prospect Medical
    • Two SSM hospitals, MU Health Care
    • Swift County Benton Health Services, Carris Health/CentraCare

#5 New phase of alignment

  • Following the high volume of announced transactions in 2017 and 2018, health systems are completing the integration of these acquisitions
  • More alignment discussions are occurring amongst healthy systems, leading to more deliberate discussions of finding a partner that enhances long-term value for all parties

Trends in Composition of Transaction Activity

Trends in Composition of Transaction Activity

  • In full year 2019, revenue and bed metrics for acquired hospitals and health systems were down significantly from the prior five years
    • Target revenue: Median revenue down 23%, average revenue down 41%
    • Target bed count: Median bed count down 27%, average bed count down 34%
  • Q4 tells a different story however, as target metrics for the quarter largely met or exceeded those from the prior five full year periods
    • Target revenue: Median revenue up 28%, average revenue down 7%
    • Target bed count: Median bed count up 72%, average bed count up 23%
    • In a more direct comparison, transactions announced in Q4 for the past five years have had a median revenue of $140 million, which is in line with Q4 2019’s median revenue figure of $132 million

Q4 2019 – 21 Announced Transactions

Q4 2019 Announced Transactions

  • Q4 2019 recorded 21 announced change of control transactions, matching the total from Q4 2016 as the lowest fourth quarter result since 2009
  • Q4 saw three transactions in which the target revenue exceeded $850 million, whereas the prior three quarters of 2019 combined for only two such transactions
  • In Q4 2019, both CHS and Tenet Health announced divestitures that when completed will result in their exits from the Virginia and Tennessee markets, respectively
  • Texas was the most active state for announced transactions with four in Q4 2019, followed by New Jersey with three

Q4 2019: Announced Transactions – Other News

Although the moderate pace of announced transactions continued in Q4, the robust level of discussions signals stability in volume going forward. Several systems are in affiliation discussions or in the preliminary stages of a potential merger:

  • Memorial Regional Health (Craig, CO) announced a letter of intent to join SCL Health
  • UNC REX Healthcare and Johnston Health approved a letter of intent towards a joint operating agreement
  • RWJBarnabas announced separate letters of intent with St. Peter’s Healthcare System (New Brunswick, NJ) and Trinitas Regional Medical Center (Elizabeth, NJ)
  • Jennings American Legion Hospital (LA) announced a letter of intent to join Lafayette General Health
  • Geisinger Health System announced a letter of intent to transfer Holy Spirit Hospital to Penn State Hershey Health
  • Floyd Medical Center (Rome, GA) announced a letter of intent to join Atrium Health
  • Ascension Health and Marshfield Clinic Health System announced a memorandum of understanding towards MCHS’s acquisition of two Wisconsin hospital, one of which was previously co-owned between the parties
  • St. Luke’s Hospital (Maumee, OH) entered into a letter of intent to be acquired by McLaren Health
  • Four independent hospitals in the Chicago-area announced talks to unite as a health system

Outlook for 2020

Outlook for 2020