Despite a volatile market, healthcare investors are undeterred. Inflation, significant labor issues and declining stock value are major headwinds that should be slowing down activity, but the past few quarters have shown the resilience of the healthcare M&A market. Nearly 1,800 healthcare deals were announced through the end of September, a steep increase from the 1,560 sales reported in the same period in 2021. This year will break records if activity continues at this pace. Investors and dealmakers announced 686 deals in the third quarter, representing a 5% drop from the 731 transactions reported in the second quarter. With all the headwinds hitting the industry, we expected a more significant decline, but the third quarter did have higher activity than Q3:21 when 628 deals were announced. Last year, most quarterly totals hovered around 600; now, the average is closer to 700.
Dollar volume remains on the lower end of the spectrum. There was $55.8 billion in announced transaction value in Q3:22, virtually on par with the amount disclosed in Q2:22. In Q3:21, however, transaction value hit $145.2 billion, more than double what we saw the same quarter this year. Publicly traded companies committed only 16% of deals in the third quarter of 2022, which partially explains the low disclosed deal volume.
The largest deal of Q3:22 belongs to CVS Health’s (NYSE: CVS) purchase of Signify Health, a national provider of home health services, for $8 billion. Multiples in that deal were also high, hitting 10.3x Signify’s 2021 revenue and 46.7x the company’s adjusted 2021 EBITDA. These multiples reflect the growing demand for home health services in the United States, fueled by demographic changes and a preference for home care versus facility care, like skilled nursing or extended hospital stays. CVS isn’t the only major corporation moving into the home health space. Optum, a significant part of UnitedHealth Group, paid $6 billion for LHC Group, Inc. in March. Humana Inc, the health insurance giant, paid $5.7 billion for the 60% stake it did not own in Kindred at Home in April 2021.
Private equity funds affiliated with New Mountain Capital, which owns approximately 60% of the common stock of Signify Health, have agreed to vote the shares they own in favor of the transaction.
Several notable tailwinds are fueling activity. Although labor issues have plagued the industry for the past two years, with every crisis comes new opportunity. Acquisitions of competitors or agencies and other consolidations can alleviate many of the labor issues hospitals or other providers face. SSM Health, a Catholic, not-for-profit health system based in St. Louis, announced one such deal in July. It purchased SLUCare Physician Group, the academic medical practice of Saint Louis University, with more than 600 health care providers in hospitals and medical offices throughout the St. Louis region. The practice’s physicians cover more than 50 specialties.
Activity slowed down in 2020 because federal funding kept many providers and healthcare organizations afloat, removing an incentive to merge with larger companies or sell assets. However, that money has largely dried up, and COVID-19 assistance is no longer a priority for Congress. Thus, companies are now under financial pressure again, and we see that in the M&A market.
Due to financial strains, Philadelphia-based Temple Health sold a few hospitals this year. According to the Philadelphia Business Journal, Tower Health, which lost $65.6 million in fiscal 2022 and is carrying approximately $1 billion in debt, has been attempting to shed some of its assets as part of its ongoing turnaround efforts. In August, Tower Health sold Chestnut Hill Hospital, a 148-bed, community-based hospital, to a new entity formed by Redeemer Health and Philadelphia College of Osteopathic Medicine. Back in June, it divested Jennersville Hospital to ChristianaCare Health System. Jennersville Hospital has been closed since December 31, 2021, and the purchase will include the hospital and Tower Health’s interest in two office buildings and an additional 24-acre parcel of land. The new name for the campus will be ChristianaCare West Grove Campus.
Through the latter half of 2020 and 2021, we were in a seller’s market due to high demand and a low supply of acquisition targets. Companies losing valuable federal support might flip the market on its head in the future, driving down multiples and valuations since sellers will be desperate to close a deal. Turning into a buyer’s market could help alleviate pressure from rising financial rates and keep the M&A market afloat. Buyers might feel safer borrowing again without having to deal with staggering multiples to close a deal. The next few months could be chaotic, especially with the midterm elections looming, which always make the markets feel uneasy. Healthcare M&A has proven resilient, but there’s much to weather ahead. Stay tuned.
