Amedisys Stock Buyback Highlights Record Prices in Home Health M&A

Amedisys, Inc. (Nasdaq: AMED) doubled down on its own home health, hospice and personal care business Monday, deploying nearly all of its cash on hand to buy back $178 million worth of stock from global investment firm KKR (NYSE: KKR).

The transaction signals leadership’s continued confidence in the Baton Rouge, Louisiana-based company’s growth prospects, but it also serves as a direct reminder of today’s competitive M&A landscape, which analysts say is hotter than ever across the board.

There were more than 115 combined deals for private-duty, Medicaid- and Medicare-certified home health businesses in both 2016 and 2017, according to properitary data from The Braff Group. In 2015, in comparison, there were fewer than 80 home health M&A deals. M&A activity in the hospice space has also been high over the past several years, data show.

Exact financial terms of deals have often gone undisclosed, though there are some exceptions that help paint a pricing picture, such as insurance giant Humana’s (NYSE: HUM) acquisition of hospice provider Curo Health Services for about $1.4 billion or its tag-team purchase of Kindred Healthcare’s (NYSE: KND) home division for about $800 million. Many deals, in general, have reportedly seen double-digit valuation multiples.

“These recent times have been the greatest valuation period for home health and hospice that we have on record,” Mark Kulik, managing director at The Braff Group, told Home Health Care News. “There are several strong tailwinds fueling it, including the baby boomers coming of age.”

More than 10,000 baby boomers turn 65 years old each day, according to the Pew Research Center.

In addition to the aging U.S. population, there are a number of other factors driving M&A activity and causing deal prices to soar, Kulik said. On a broader level, for instance, players throughout the health care system are beginning to recognize home health and hospice services as key components to the overall continuum of care in terms of improving patient outcomes and reducing costs.

“We’re finally getting to the point where the [health care] industry at large is recognizing that home health and hospice really are part of the solution,” Kulik said. “If you truly want to reign in the runaway cost of health care, and you truly want to see significant advancements in positive outcomes, then home health and hospice, absolutely, are major parts of that formula.”

Strategic buyers attempting to capture more of the in-home health care patient population in preparation of the shift toward value-based purchasing models is also a prominent factor, Cory Mertz, managing partner at Mertz Taggart, told HHCN via email. Hospice M&A activity, in particular, is largely driven by the space’s typically strong margins, he said.

“The landscape is as hot as I can remember across all three sub-sectors of home health, home care and hospice, with hospice definitely leading the way,” Mertz said. “The multiples I am seeing today for quality agencies is as high as I’ve seen them.”

Breaking down Amedisys’ move

Amedisys’ buyback represented half of KKR’s holdings in the company and about 7% of aggregate outstanding common stock shares. Amedisys was able to repurchase the shares at a slightly reduced price using $140 million in available cash, while funding the rest through borrowings under the company’s existing revolving credit facility.

Amedisys and KKR had been discussing the buyback since fall, Amedisys CEO Paul Kusserow said Tuesday during a presentation at the Jefferies 2018 Global Healthcare Conference in New York. KKR had a five-year target to sell its Amedisys holdings, and the two groups decided the time was right to “pull the trigger” on a move, Kusserow said. Timing was likewise ideal due to the transaction’s immediate value to shareholders, he said.

Additionally, the buyback made sense for Amedisys “given current acquisition multiples,” according to the company, which still sees itself as well-positioned to pursue future deals.

“I’m a deal guy,” Kusserow said. “So, I always like to do deals.

Amedisys plans to focus on small- and medium-sized deals, ones in the $100 million range, moving forward, but still may pursue “a couple of big deals” that check in at less than $500 million, he said. It would be “silly to do a major acquisition” at the moment, though, because Amedisys would then be “gummed up” working on integration, perhaps slowing the company’s recent momentum, Kusserow added.

Amedisys stock shot up nearly 8% to a 52-week high of $82.60 per share following the buyback announcement.

“I think it’s more Amedisys saying, ‘We think there is significant value to our own stock. We have these growing cash reserves, so let’s allocate some of it to our own stock,’” Mertz said. “Amedisys is still acquisitive.”

Private equity jumping in on deals 

Private equity investors have also caught on to the bustling M&A landscape, especially when it comes to larger platform investments, or starting points for later follow-on acquisitions in the same area.

A decade ago, private equity only took part in a handful of platform investments in the home health and hospice spaces, according the proprietary data from The Braff Group. That spiked to more than 20 platform investments in 2016 and more than a dozen last year.

“A large portion of activity in the industry has been fueled, of late, by private equity,” Kulik said. “There’s a lot of activity by private equity saying, ‘I like the risk-return fundamentals of the business. I think it’s a great place to be for many years to come, and we think it’s a good investment for our shareholders.’”

No clear end in sight 

Barring unforeseen roadblocks, the vigorous M&A activity and high deal prices will likely continue over the next year or two, analysts say.

“I don’t see a lot of dark clouds on the hospice horizon with the exception of longer term concerns around the roll out of Medicare Advantage,” Mertz said. “Home health is always a proposed rule, final rule or MedPac proposal away from moving up or down the valuation spectrum.”

Some potential speed bumps are right around the corner.

In May, the Centers for Medicare & Medicaid Services (CMS) announced it was opening up public comment on a new proposal to bring back a slightly tweaked version of its Pre-Claim Review Demonstration (PCRD) for home health Medicare claims. CMS initially implemented pre-claim review in Illinois in 2016 with plans to later expand it into four other states. The demonstration was eventually suspended, but, when in effect, it contributed to a 17% drop in home health and hospice deals in the third quarter of 2016.

The specter of PCRD alone may already be hampering outlook, Darby Anderson, chief development officer for Addus HomeCare Corp. (Nasdaq: ADUS), told HHCN.

“Home health expectations are down due to [the] pre-claim proposal and other reimbursement pressures, while hospice expectations are somewhat elevated given increased buyer competition and improved benefit utilization trends,” Anderson said.

Written by Robert Holly