By Carlos Asorey (Georgetown University) 26/10/2018 |
Overview of the deal
Acquirer: RCCH HealthCare Partners
Target: LifePoint Health
Estimated value: $5.6 bn
Announcement date: July 23, 2018
Acquirer Advisors: Barclays and MTS Health Partners
Target Advisors: Goldman Sachs
On July 23, 2018, LifePoint Health and RCCH HealthCare Partners announced a merger worth $5.6 billion, representing a 36% premium to LifePoint Health’s closing price on July 20, 2018. Following the merger, the company will operate privately under the name of LifePoint Health and the direction of William F. Carpenter III. Rather than a pivot or cross-industry strategic merger, this deal represents what is essentially an indirect acquisition by part of a private equity firm, Apollo Global Management, that could spur further private equity firm interest in the space.
The newly combined company would boast pro forma 2017 revenues of over $8 billion, along with a diversified spread of hospitals and affiliated physicians across the United States. Having been unanimously approved by LifePoint Health’s board of directors, all that follows is regulatory approval and the passing of LifePoint Health’s shareholders.
LifePoint and RCCH are aligned in our missions and commitment to ensuring that non-urban communities across the country have access to quality care, close to home. - William Carpenter, LifePoint Health CEO
Company details (LifePoint Health)
LifePoint Health provides healthcare services for small, rural, and growing areas in the United States. The company provides both inpatient services, such as general surgery and radiology, as well as outpatient services.
- Founded in 1999, headquartered in Brentwood, Tennessee
- President and CEO: William F. Carpenter III
- Number of employees: 46,000
- Market Cap: $2.5 bn - EV: $5.4 bn
- LTM Revenue: $6.2 bn - LTM EBITDA: $660 mn
- LTM EV/Revenue: 0.85x - LTM EV/EBITDA: 7.94x
Company details (RCCH HealthCare Partners)
RCCH HealthCare Partners is a private company owned by Apollo Global Management that provides health services in non-urban communities in the United States.
- Founded in 2009, headquartered in Brentwood, Tennessee
- President and CEO: Martin S. Rash
- Number of employees: 13,000
- Market Cap: (Private) - EV: (Private)
- LTM Revenue: (Private) - LTM EBITDA: (Private)
- LTM EV/Revenue: (Private) - LTM EV/EBITDA (Private)
Projections and assumptions
Following news of a possible acquisition by Apollo Global Management, LifePoint Health’s share price rose 40% in after-hours trading. The final details of the deal indicate that LifePoint Health’s current shareholders would receive $65 per share in cash, representing a 36% premium on the last share price prior to the announcement of the deal. This represents a purchase price of $5.6 billion, $2.9 billion of which is composed of net debt and minority interest. If cleared, the deal would be financed by Barclays, Citigroup, RBC Capital Markets, and Credit Suisse.
Directly following this merger, the newly merged company would operate a total of 84 non-urban hospitals across 30 states, along with numerous other facilities such as physician practices, outpatient centers, and post-acute service centers. LifePoint Health would further include approximately 60,000 employees and over 12,000 licensed beds.
The announcement of this merger also had the effect of increasing share prices of competing for-profit hospital chains, such as Community Health Systems and Tenet Healthcare Corp., which went up 14% and 8% respectively. This indicates that rather than represent a strategic merger in the non-urban health services space, the deal could spur further private equity (PE) interest in this space as these firms seek to convert hospital assets into REITs, or real estate investment trusts.
While LifePoint Health management are keen to point out the various synergies of the merger including a vast network of hospitals and physicians across 30 states, many analysts point to Apollo Global Management’s practice of leasing some of the underlying real estate of its hospital properties, as they did with RCCH HealthCare Partners. In so doing, Apollo Global Management would be converting some of LifePoint Health’s current real estate assets into REITs, thus partially shifting away from the healthcare space. While this may be somewhat justified given recent regulatory uncertainty in the US healthcare space, some analysts argue that the market prefers these real estate properties under the management of hospitals rather than as REITs; following this, it would seem that Apollo’s REIT play would sacrifice potential increased healthcare revenues in favor of a possibly safer but less lucrative real estate revenue stream.
Regardless of Apollo’s final decision, this merger represents a proven private equity interest in the non-urban healthcare space. Nonetheless, while investors were quick to jump onto shares of other such companies, the fact remains that highly leveraged balance sheets across this space may dissuade further PE M&A activity for the foreseeable future. Furthermore, in the long-run this should not represent a seismic shift across the industry as operational non-urban hospitals will continue to be necessary in more rural regions of the United States.
Risks and uncertainties
On the regulatory side, the only risks this deal could face are with regards to assets located in Arizona and Tennessee as these are the only states with significant overlap in operations across both LifePoint Health and RCCH HealthCare Partners. Nonetheless, these only make up a total of four hospitals, thus representing minimal divestiture that both companies and Apollo Global Management will most likely take on. Regarding current LifePoint shareholders, there is no obvious reason for which they would oppose the merger, rather most should be in favor given the 36% premium and as indicated by the strong positive sentiment expressed in the aforementioned post-trading hours share price.
While it seems the deal is highly leveraged and would therefore usually raise concerns of debt payments and financing, this would not appear to be an issue as the main player behind the merger is a private equity company that specializes in this type of activity. Nonetheless, an important consideration is the opportunity cost of converting hospital assets into REITs, especially with favorable demographic trends in the United States and a seemingly more friendly healthcare regulatory environment.
As the newly created company will be private, shareholder risks and equity considerations are beyond the scope.
We believe that LPNT makes some sense as a leveraged buyout (LBO) as it could create some opportunity to sell assets and cut costs. Meanwhile, Apollo could potentially create some synergies that other buyers could not by merging LPNT with its current non-urban hospital operations.
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