Any anxieties investors had over external growth activity for Amedisys, Inc. (Nasdaq: AMED) were likely alleviated last week when the Baton Rouge, Louisiana-based home health giant announced its $340 million agreement to acquire Compassionate Care Hospice.
Indeed, after acquiring the Parsipanny, New Jersey-based company, Amedisys is expected to become the hospice industry’s third-largest provider, operating in nearly three dozen states and with an average daily census hovering around 11,000 patients. The deal is just as savvy as it is big, too, as Amedisys was able to source it internally and for an extremely reasonable valuation that runs counter to the piping hot M&A market.
It’s for those very reasons that analysts in the early going are labeling the move as a major victory for Amedisys, already one of the two largest publicly traded home health companies in the country.
“Quite honestly, investors had been waiting for something like this to happen, maybe thinking it would have happened earlier in the year,” Dana Hambly, an analyst with independent financial services firm Stephens, told Home Health Care News. “I don’t want to say people are relieved, but they’re hopeful that there are more of these deals to come.”
With very little portfolio overlap between Compassionate Care Hospice and Amedisys, the deal, expected to close in February 2019, is naturally a good strategic fit, Hambly said. That fit is exemplified by how Compassionate Care Hospice tentatively brings 12 new states to Amedisys’ growing hospice business.
“I think Amedisys has been very open about its intention or desire to acquire hospice assets,” Hambly said. “And, in general, I think the government would like to push more care, more folks into hospice care moving forward, thinking it could help address the health care cost issue and be a potential money saver.”
Overall, Amedisys’ agreement to acquire Compassionate Care Hospice is for a fixed price of $340 million, which puts the valuation at roughly 12.6 times EBITDA. Taking into account a net of $50 million dollar-for-dollar payment related to tax assets and working capital, that valuation comes in closer to 10.7 times EBITDA.
It checks in at about 8 times EBITDA, however, when combination synergies are also factored into the equation.
For comparison, Humana Inc.’s (NYSE: HUM) acquisition for hospice provider Curo Health Services was also reportedly done at a valuation in the mid-to-high teens.
“Being disciplined is something that good managers and good executives stick to,” Brian Tanquilut, an equity analyst at global investment banking firm Jefferies, told HHCN. “In the end, Amedisys was able to get a deal done at a fair and attractive valuation for both patients.”
Compassionate Care Hospice generates about $188 million in annual revenues with adjusted EBITDA of $27 million.
Brokering a deal
Large acquisition agreements, especially in complex sectors such as health care, are often brokered transactions. Amedisys’ decision to source the Compassionate Care Hospice deal completely internally is “pretty unusual,” Hambly said.
“This is a big platform,” he said. “You’d think this would have been a brokered deal where brokers would have found them and shopped [a deal] out to the highest bidder.”
Sourcing deals internally takes a lot of time and resources, Tanquilut said, meaning it’s possible that this approach is a “one-off” and not something Amedisys can keep doing.
One of the first steps Amedisys will take after finalizing its acquisition will be to convert Compassionate Care Hospice to Homecare Homebase, a process that should take about 180 days, according to the company. In 2019, Amedisys will then grow low average daily census care centers and expand margin in large care centers, also adding sales resources and rolling out retention packages for key employees.
Amedisys expects to bring Compassionate Care Hospice closer to its margin profile by 2021. Compassionate Care Hospice currently operates with 14.4% margins. Amedisys hospice margins are estimated to be about 20%.
After the acquisition is final, the business will be rebranded as Compassionate Care Hospice, an Amedisys company.
Despite praise Amedisys has received from Hambly, Tanquilut and other analysts and investors, the company’s stock price has not received a noticeable bump in the days following news of the Compassionate Care Hospice acquisition agreement.
That’s largely because of the market’s broader dip of late, analysts note.
Assuming 11 months of contribution from Compassionate Care Hospice next year, a research brief from Stephens projects that Amedisys’ 2019 revenue will climb closer to $1.94 billion over current estimates of $1.77 billion. EBITDA is projected to climb closer to $218 million over a current $193 million estimate, assuming no synergies.
Even after the deal, Amedisys’ balance sheet remains very flexible for continued external growth opportunities, with an initial leverage ratio of about 1.5 times, according to the company. Following the repurchase of 2.4 million shares from KKR earlier this year, Amedisys’ leverage currently stands at 0.5 times.
“They’re certainly in a very good position to do more acquisitions if they present themselves,” Hambly said. “That’s really not a hurdle.”
The Compassionate Care Hospice acquisition announcement came roughly a week after Amedisys announced it had opted to extend an employment agreement with Paul Kusserow, its president and CEO.
The extension goes from Sept. 27, 2018 to Dec. 16, 2021, adding three additional years.
Kusserow first joined Amedisys in 2014. Since then, he has led the company’s clinical, cultural and financial turnaround efforts, which include stock price nearly quintupling from $26 per share to an all-time high of $124.
“He deserves it,” Hambly said. “I think since he took over, [Amedisys] was a company in transition … but the initiatives he put forward kind of from the time he got there have really started to play out.”
Prior to joining Amedisys, Kusserow served as a senior vice president and chief strategy, innovation and corporate development officer at Humana.
(Oct. 15, 2018) Editor’s note: An earlier version of this story stated that “unconfirmed reports have placed Texas-based post-acute care provider AccentCare’s recent acquisition for Accolade Home Care and Hospice at a valuation of about 19 times EBITDA.” AccentCare told HHCN in an email that those reports are inaccurate and that the valuation is incorrect.
Written by Robert Holly