COVID-19, PDGM to Drive Home Health Deal Activity Up While Pushing Valuations Down

The COVID-19 emergency has slowed mergers-and-acquisitions activity in the home-based care space, largely due to travel restrictions, general sector uncertainty and the shifting priorities of top leadership.

However, interest in home-based care deals remains robust and valuations remain high. In fact, M&A experts expect deal activity to pick up dramatically come fall 2020 and beyond.

“The cash assistance that came from COVID-19 kind of masked the cash flow problems that we expected providers to have from the Patient-Driven Groupings Model (PDGM),” Stoneridge Partners President Rich Tinsley said. “I would expect after August [or] September you’re going to start seeing those agencies have some [difficulties] … as that cash burns off. … In so doing, I think you’re going to see those agencies come back out to market.”

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Tinsley made those comments Tuesday during a presentation at the National Association for Home Care & Hospice (NAHC) 2020 Financial Management Conference, which was held virtually this year due to the COVID-19 emergency.

Struggling agencies will likely come to market with lower valuations, presenting unique, affordable opportunities for private equity companies and strategic buyers looking to make a deal.

Those opportunities are especially appealing considering the fact that home health services are in high demand amid the coronavirus. The COVID-19 emergency has pushed more and more long-term and post-acute care into the home and out of institutional settings to keep seniors safe.

More than half of the states in the country have rising COVID-19 case counts in nursing facilities, according to new same-store data compiled by the National Investment Center for Seniors Housing & Care (NIC).

On top of that, home health and hospice valuations reached an all-time high in the first half of 2020, according to a recent report by PricewaterhouseCoopers’ (PwC) Health Research Institute. Multiples hit 29 times in the first six months of the year, up from the previous high of 26 times in 2019.

Those figures are in reference to LTM EV/EBITDA.

PDGM and the coronavirus could help drive down those multiples — or at least, that’s what some buyers are hoping, according to David Berman, principal of health care M&A at Simione Healthcare Consultants.

“Moving forward into the next hundred days and having some conversations with some active buyers in the past, they expect Q3, Q4 and Q1 of 2021 to be very active on the M&A side,” Berman said during the presentation. “I don’t think anybody’s going to be looking to overpay for a B- or C-level asset. … People are going to be looking for value.”

While some private equity companies could be willing to pay more, he noted that most buyers are looking to drive down the multiples in the home health space.

Buyer considerations

Even though providers will come to market at a lower price than usual, don’t expect buyers to jump on every affordable agency they see. There are a number of considerations in play for acquiring entities to ponder before diving in.

“It’s trite to say, ‘One plus one has to equal more than two,’ but in the M&A world, it has to equal more than two,’” Berman said. “Otherwise, why do the deal? There has to be gained synergies.”

Those synergies can be expense savings, revenue growth or market expansion opportunities, just to name a few examples. In addition to identifying potential synergies, another important consideration is how long it will take for those synergies to be realized, Berman said.

Buyers will also be conducting other typical pre-transaction due diligence activities, such as working to understand an agency’s workflows, culture and financials. On top of that, they’ll be looking at new COVID-19 specific considerations.

For example, does the potential acquisition target have a PPP loan? If so, that introduces new risk for the buyer.

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