With the expansion of insurance coverage and the heightened demand for treatment, the stage is set for the behavioral healthcare segment to come into its own. As a result, new investors are looking for opportunities: specifically, treatment centers with larger outpatient programs, demonstrated outcomes and future potential.
“All types of companies are going to attract interest,” says Kevin Taggart, managing partner with Mertz Taggart.
But what attributes are most likely to catch the investor’s eye? The right service offering is one.
Taggart says private equity is aware of the constant pressure from insurers, expecting programs to triage patients to the least costly level care. The least costly choice is most often outpatient care, therefore, outpatient has become the identified growth area. Even with an inpatient stay, the next step in care moves to outpatient, which further supports demand. Programs that can meet the demand are viewed as the most attractive to investors, he says.
Additionally, healthcare providers now must be able to demonstrate value to payers of all types in this era of accountable care. Taggart says being able to cite data showing a certain percentage of patients remain sober after six or 12 months, for example, will also make a program more attractive to investors.
“A good management team is also important to private equity,” he says. “A second level of management that can run the organization after a sale is critical. Private equity is looking for an owner that is willing to stay and take the ‘second bite of the apple.’”
Taggart explains that using new capital to expand the organization to new locations and additional services would be the first “bite of the apple.” After five years or more, the now larger company would be worth more, and the owner might sell a majority stake at a higher value. That’s the second “bite,” he says.
“The big thing that any CEO needs to think about—besides planning for a deal in advance—is to look at the financial outlook from the buyers’ perspective,” he says. “You’ve got to prepare for the sale whether the sale is this year or two years from now or three years from now.”
Taggart cites the Acadia purchase of CRC as a good deal for both partners. CRC sold for what was effectively 2.6 times their revenue, which he says is a good price for a service-based organization. For Acadia, the investment community clearly saw the potential because on the day the transaction was announced, Acadia’s stock jumped $10 a share and remained at that level.
“That added $600 million in market value to their company overnight, and $1.5 billion in enterprise value to their company,” he says.
As for what’s next for Acadia with CRC under its umbrella, Taggart says most acquiring companies end up rebranding the acquisition with their own name for consistency, so look for the CRC name to fade in time. Merging the systems and cultures of the combined company might be a bit more difficult, but that just gets back to his point about doing more preparation on the front end of the deal, he says.
How long will the consolidation trend last? The segment is just warming up. There are likely more deals coming in the behavioral pipeline for the next four or five years.