Amid the ongoing COVID-19 pandemic, concern has started to bubble up to the surface over a potential disruption to in-home care M&A activity.
For now, experts say it’s business as usual. But coronavirus could have some negative impact in the long-run.
In fact, on Tuesday, S&P Global economists predicted a global recession for 2020, forecasting GDP growth in 2020 at just 1.0% to 1.5%, “with risks remaining firmly on the downside.” After plunging Monday, U.S. stocks rose slightly, boosted by the latest emergency measures from the Federal Reserve.
“[The impact on in-home care M&A activity] really depends on how long the coronavirus stays a threat in our country, because, in the short-term, I haven’t seen changes,” Mark Kulik, managing director of The Braff Group, told Home Health Care News. “Due diligence is still going on for the deals that I’m working on. We are still looking to achieve targeted closing deadlines.”
The coronavirus has reportedly impacted nearly 200,000 people — and counting — worldwide.
And while a testing kit shortage means the exact number of cases is largely unknown, there were reportedly more than 5,000 cases in the United States as of Tuesday.
For dealmaking to remain stable, banks and other financial entities will need to stay engaged and open for business. So far, that’s true, according to Kulik.
“I’m hearing from buyers that a lot of banks are actually calling and using this time to position themselves as being available to continue to help buy businesses,” he said.
This shouldn’t come as a surprise to anyone that is familiar with the in-home care arena and the health care sector in general, according to Kulik. Despite headwinds from COVID-19, the in-home care market will continue to be buoyed by demographic shifts and the health care policymakers trying to shift care downstream.
“Our business is somewhat insolated from the broader economy,” he said. “A lot of health care is not elective. You don’t choose when you get sick.”
Of course, if coronavirus continues to spread rapidly, raising the global death toll, buyers, sellers, and other interested parties should expect to see an impact on the in-home care M&A market.
For one, liquidity could become an issue down the line.
“If you look at the stock market broadly, there has been turmoil,” Les Levinson, co-chair of the health care transactions practice at legal firm Robinson & Cole, told HHCN. “This is usually our best measure of liquidity in the equity markets. If that continues to either go down or be adversely affected over a longer term, it could impact the ability of private equity firms to raise or deploy capital.”
In general, private equity players have carved out a presence within the in-home care market over the years. In 2018, private equity accounted for at least 57 of 129 transactions, and last year private equity accounted for at least 46 of 101 transactions.
If liquidity does become an issue down the line, certain deals could come to halt, Rich Tinsley, CEO and president of Stoneridge Partners, told HHCN.
“I think you would see M&A transactions being paused for a period of time if that happened, but that would only be for transactions involving people who were not purchasing out of cash,” Tinsley said.
For home health care, the Patient Driven Groupings Model (PDGM) is another factor. Post-PDGM, many looked upon large companies to lead M&A activity due to their ability to better leverage resources under the new payment model.
“If their stock prices continue to be impacted and they have liquidity issues [these large companies] may need to reevaluate the number and type of companies that they are going to be able to acquire,” said Levinson.
Aside from liquidity, valuations could also be impacted due to disruption caused by the coronavirus.
“If the businesses are trading at a certain level and the fundamentals are strong at those levels, [valuations shouldn’t be impacted],” Levinson said. “But if there are more sellers than buyers, valuations could take a hit. We’ll have to stay tuned to see.”
In the wake of the coronavirus outbreak, health authorities and other experts recommend that people who may be infected stay home to curb the spread of coronavirus.
Even those who are not experiencing symptoms related to the virus are encouraged to practice social distancing, with many workplaces around the county implementing mandatory remote work policies.
In light of social distancing measures, recession concerns have come to the forefront.
“While social distancing is the recommendation of the experts, and is the strongest plan to address COVID-19, it had the additional impact of increasing the chances for a recession,” Kulik said. “It’s causing everyone to pull back on their normal activities, meetings, conferences and projects. In certain cases, some key personnel that are mission-critical for certain businesses may not be available, they may be sick.”
Keeping the economy from feeling the impact of reduced levels of activity and halting the spread of coronavirus will be a balancing act, according to Kulik.
For now, most experts maintain that in-home care deals are moving forward, but there is talk of some pumping of the breaks, according to Levinson.
“We haven’t seen anybody pull the plug on the transactions that we are currently working on,” Levinson said. “This is an extremely fluid time, so it’s impossible to predict entirely what’s going to happen. We think that these deals will continue forward, albeit they may happen slower as people reassess what’s going to happen operational and in the financial markets.”