Charter Health Care Group — a PE-backed post-acute care platform company with multiple locations across five states — announced Tuesday the acquisitions of both Vitality Home Healthcare and Heartwood Home Health & Hospice.
The news comes less than two weeks after Bridges Health Services similarly announced a series of transactions at the start of October. It likewise comes after The Pennant Group Inc. (Nasdaq: PNTG) closing on a new joint venture and making its own hospice acquisition.
While none of these deals are directly related, they signal a recent rekindling of the M&A fire across the home health and hospice spaces. Dealmaking experts are starting to notice, too, with some expecting a frenzied final few months of 2020.
“I was discussing this with my partner,” Rich Tinsley, president of M&A advisory firm Stoneridge Partners, said during last month’s Home Health Care News FUTURE event. “I’m expecting the end of this quarter and Q4 maybe being one of our strongest second halves of the year in the last decade. Volume is definitely picking back up and, speed is picking back up in transactions on deal flow.”
Originally, many home health and hospice insiders believed 2020 would be a record-setting year for dealmaking, partly due to the transition of the Patient-Driven Groupings Model (PDGM) and a handful of other major regulatory changes. But that historic M&A action hasn’t played out for a variety of reasons.
On one hand, many of the small- to mid-sized home health and hospice agencies that were likely going to come on the market this year haven’t due to the ongoing COVID-19 pandemic. Operators once interested in selling are now too focused on delivering care during a crisis, while formerly distressed businesses have been able to stay afloat through Paycheck Protection Program (PPP) money, Medicare loans and Provider Relief Fund grants.
At the same time, buyers looking to conduct traditional due diligence or “kick the tires” on acquisition targets haven’t always been able to because of travel restrictions, Tinsley noted.
“Everybody was expecting to have a lot of volume to the home health side, with lots of those smaller to medium-sized [deals],” he said at FUTURE. “Then as we kept going into the transition to the new payment system, COVID hit. Everything kind of went into quicksand from a deal perspective.”
Buyers and sellers of all shapes and sizes have clearly started to rise out of the muck in recent weeks, however.
In addition to the previously mentioned deals, for example, Cypress at Home announced its acquisition of All About Home Care Inc. on Oct. 5., while Nova Leap Health Corp. made home care acquisitions in the New England and South Central U.S. markets. Kindred Healthcare also announced the pending sale of its RehabCare business line to Select Rehabilitation this month.
Perhaps the largest of all the home health and hospice deals to take place this fall: The Providence Service Corporation’s (Nasdaq: PRSC) $575 million play for Simplura Health Group, a company that oversees a home health and personal care network spanning seven states.
“There was a four- to six-, maybe seven-week period of time when everything got frozen,” Tinsley said. “We’re just now getting out of that and things are moving.”
‘Not exactly the same deal’
It’s not just the confirmed deals that suggest the M&A landscape has started to heat up again. There have been rumors swirling around at least two noteworthy deals in the home-based care space.
Toward the end of September, reports surfaced that Centerbridge Partners and Vistria Group were joining forces on a $1.4 billion deal for Wellspring Capital Management’s Help at Home. Days later, sources familiar with talks said Anthem Inc. (NYSE: ANTM) was in “late stage” talks to acquire PE-backed CareCentrix.
“The COVID crisis has underscored how important home health is to the future of health care,” Kenneth Baer, a CareCentrix spokesperson, told HHCN at the time. “Based on that and the strength of our business, we have received many interesting inquiries, but we are focused on delivering better health for the thousands of patients who rely on us for care.”
Apart from direct acquisitions, general investment in proven home-based care businesses is picking up as well. Also in September, Liberty Lake, Washington-based Family Resource Home Care announced a new investment partnership with Great Point Partners, a health care-focused private equity group out of Connecticut.
Tinsley isn’t the only one to notice all of the action. Philip Feigan, managing partner of Polsinelli’s Washington, D.C., office, has also seen a clear uptick in transactions — with an important caveat.
“Over the last four weeks, they’re really picking up,” Feigan said at FUTURE. “They’re as strong as they’ve ever been. A lot of the deals that have stopped are looking a little different. When they come back, they’re not exactly the same deal.”
M&A legal hurdles
Although deals are starting to pick back up, negotiations and agreements likely look very different compared to years past, according to Feigan. In fact, some yet-to-be-finalized deals that took shape in late 2019 for 2020 may even see substantial changes.
“Prior to COVID, I think the legal, regulatory and even the tax [factors], were not necessarily driving the deals,” Feigan said. “They were just following the deals, making sure there is nothing that stopped the deal from happening. Now, there’s a lot more involved on the legal side because of the things that have happened over the last few months.”
PPP money, in particular, becomes a significant legal consideration in any deal.
Since the Small Business Administration (SBA) initiated the program, thousands of home-based care organizations have received PPP loans, which could range from less than $150,000 to millions of dollars.
Unlike other loan programs, PPP money is open to full forgiveness. Yet that forgiveness process hasn’t begun, so prospective buyers need to be aware of any PPP risk their acquisition target currently bears.
“The key that made it different from any other type of loan is if you used the money properly and followed the rules, you could get up to the entire amount of the loan forgiven,” Feigan said. “When you’re talking about doing an acquisition or selling your business, if either party has received a PPP loan, that can be a lot of money you’re talking about that’s at risk of forgiveness from the government.”
When PPP money is involved, Feigan recommends that sellers first seek SBA consent for a change of ownership. Along those lines, sellers should additionally secure the consent of the bank that handled the PPP loan and related paperwork.
From a buyer’s perspective, it may even be worth revisiting the timing of a deal so it can take place after loan forgiveness has been reached. Alternatively, a buyer should consider adding language to any deal clarifying who bears risk if a loan isn’t forgiven.
“There’s a whole new playbook for the PPP part of doing a deal that didn’t exist before,” Feigan said. “You don’t want to rely on what you’ve normally done in a transaction.”
How common are PPP considerations in today’s home health and hospice deals? Stoneridge had just closed on eight transactions in the 60 days prior to Tinsley’s appearance at FUTURE — and all eight of those deals had some sort of PPP component.
Besides the immediate consideration, buyers and sellers in PPP-related deals also need to think about future tax implications, according to William Sanders, who chairs Polsinelli’s tax practice group.
Under U.S. tax law, loans that are forgiven typically fall into taxable-income territory. With PPP specifically, if a loan is forgiven, expenses that are usually deductible won’t be deductible, which has the same basic impact as making the receipt of the forgiveness taxable.
“What this means from an M&A-transaction perspective is that a seller needs to be aware of the fact that those expenses won’t be deductible by them in the pre-M&A closing period,” Sanders said at FUTURE. “And a buyer, on the other end, has to make sure that the documents will require the seller to exclude those expenses as deductions in the period prior to the transaction.”