Home Health M&A Valuations Near Peak

There was a dramatic drop off in the number of home health deals completed in 2015 as compared to years past, but even with valuations at all-time highs, strategic buyers will continue to seek out acquisitions that add significant value to their portfolios in the year ahead.

“Buyers will be looking for things that really move the needle,” Mark Kulik, managing director of The Braff Group, said Tuesday during a Home Health Care News webinar. “The quantity [of deals] may be down or flat, but if you look at the revenue, I see that being up.”

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That was the consensus among panelists participating in the webinar titled “Home Health Finance & Investment Outlook 2016.” The panel consisted of Kulik; Jim Moskal, a partner with Livingstone; and Gil Brindley, vice president of Gemino Healthcare Finance.

Their views align with robust pipelines coming to light among large players in the sector—including LHC Group Inc.’s (Nasdaq: LHCG) pipeline for the year ahead that could produce up to $1 billion in revenue and Amedisys Inc.’s (Nasdaq: AMED) hefty 400-deal pipeline of its own—as providers aim to expand their offerings and better leverage health systems amid an environment riddled with value-based purchasing and the implementation of quality measures.

These strategic buyers seem to be the ones driving valuations up, too. Valuations have been at all-time highs over the last two years, Moskal said, motivating sellers to take their products to market.

When it comes to acquisition candidates, some key features buyers look for include the quality of care delivered, the management team, size and geography of the asset, Moskal said. Adjusted EBITDA should hang in the mid-teens to make a target competitive, Kulik added, and compliance programs should be strong.

“Buyers want to see proof, so the metrics you have are important to tell your story and differentiate yourself from other agencies that [buyers] are looking at,” Kulik said.

Private equity players still play a significant role in M&A activity in the home health space, the panelists agreed, but the real buyers tend to be publicly traded businesses.

“They’re struggling with justifying these valuations,” Brindley said. “They might [instead] be trying to find assets that are underperforming or disjointed, that allows them to buy at a better multiple.”

As such, the home health sector is likely nearing its peak in terms of pricing.

“To go up any higher, that’s staggering territory for predominantly a service-based industry,” Kulik said. “I think we’re going to enjoy the peak here until this time next year.”

Written by Kourtney Liepelt