Following a record-breaking year for home care, home health and hospice M&A, deal volume took a dive in the first quarter of 2022. In fact, it was record-breaking on the opposite side of the spectrum.
Despite the low figures, M&A experts are still optimistic that the number of deals will rebound.
A total of 26 home health, home care and hospice deals occurred in the first quarter of 2022 compared to over 50 transactions in both the third and fourth quarters of 2021, according to a report from M&A advisory firm Mertz Taggart.
Deals spiked late last year as transactions delayed by COVID finally came to fruition. Sellers, fearing capital gains hikes, scrambled to close sales before the new year.
While home health M&A volume fell — like the other sub-sectors — Mertz Taggart Managing Partner Cory Mertz told Home Health Care News that he expects a higher transaction volume in late 2022, but that it will be hard to replicate 2021’s numbers.
“I don’t expect [Q2 2022] to be significantly better, mostly because of the acceleration of exits we saw in 2021,” Mertz said in an email Tuesday. “I do expect higher transaction volume in late 2022 compared to the first half, but we are keeping an eye on interest rates and the home health proposed rule, which is usually published in June.”
Mertz said the low numbers are really driven by the number of sellers that decided 2021 was going to be their exit year. Owners were motivated by two things: the concern capital gains tax rates would increase on Jan. 1 and burnout.
February tied the lowest number of closed home care, hospice and home health transactions in one month in over four years, with a total of three transactions reported.
COVID-19 has also taken its toll on owners and operators, Mertz said. Even though buyer demand has not diminished, replicating 2021’s record-breaking figures seems unlikely.
“Many of the folks doing transaction work – buyers, bankers, advisors, attorneys, consultants – were stretched getting deals closed in 2021, and are rebuilding their pipelines in early 2022,” Mertz said.
Future M&A optimism
Like many in the space, Robinson & Cole LLP had an incredibly busy 2021.
And despite the first quarter lull, Les Levinson, the co-chair of the transactional health care practice at the firm, said he’s optimistic about the rest of the year.
“We still think that the markets are strong,” Levinson said.
In December, Robinson & Cole LLP had four very large closings, some of which were even finished midday on Dec. 31. Levinson said he and his colleagues were running up against the wire because of the capital gains tax-hike fears.
“I’m sure there were many other buyers, sellers, private equity firms, advisors and lenders who experienced the same kind of phenomenon,” Levinson said. “So now you’re coming to the early part of ‘22, and it’s only natural that transactions that might have otherwise rolled over into 2022 didn’t because they were done in 2021.”
While talking to bankers these days, Levinson said it does seem that the due diligence processes — particularly from the buyer perspective — are running longer. Because of that, deals are taking a bit longer to complete, which then “upsets the calendar, generally, in terms of timing,” he said.
On a macro scale, the dip in M&A activity in the home-based care space mirrors the activity for M&A overall in the first quarter of 2022. According to a report from GlobalData, total transaction value dropped to $725 billion — almost 23% lower than Q4 2021.
Many factors have had an effect on the dip in deals, from domestic issues to international ones, Levinson said.
But health care is generally the one sector less affected by the sort of issues plaguing other industries.
“People continue to want to have their care provided in a non-congregate setting, at home, and in a lower-cost environment,” he said. “Everyone that I talk to continues to feel quite positive about the transaction environment, certainly for the balance of 2022. It feels like we will continue to be pretty busy. As for when that stampede starts again – is it 30 days from now? Two weeks, or two months? It’s hard to say exactly.”
Following major deals like UnitedHealth Group’s (NYSE: UNH) purchase of LHC Group (NASDAQ: LHC), Levinson believes the space will continue to be busy with small and medium-scale deals.
“The market continues to still be pretty fragmented,” Levinson said. “The appetite for consolidation seems to continue to be pretty strong, even if it’s taking a little bit longer to process some of those transactions. So I would think that you’re going to continue to have a pretty healthy amount of deal flow coming out of that.”
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