Transactions Rebound as Providers Find ‘New Normal’

The second quarter of 2020 saw the lowest number of home health, home care, and hospice transactions since the end of 2017. That sudden downturn was not a surprise, as the COVID-19 pandemic threw cold water on deal-making conversations while casting a long, uncertain shadow on all senior care subsectors.

Since spring, however, home-based care buyers and sellers have had a chance to adapt to the “new normal” focused on infection control, government relief, and new telehealth technologies. Across the home health, home care, and hospice landscapes, patient and client volumes have additionally rebounded.

Transaction activity appears to have recovered as well, particularly for home health assets.

“I probably sound like a broken record at this point, but hospice M&A activity remains healthy, with the only issue being demand that far outpaces supply,” Mertz Taggart Managing Partner Cory Mertz says. “The real takeaway from Q3 is that we’re starting to see home health deals return, which is great news headed into 2021.”

Cory Mertz, Managing Partner

In total, there were 25 transactions across home health, home care, and hospice in Q3 2020, Mertz Taggart data shows. That’s at least four more deals than in the previous quarter, with some deals likely still unreported.

The sum of sub-industries (broken down above) does not always equal total sector deal volume,
as some transactions include more than one sub-industry.

Home Health Deals Spike

In Q2, there were just five home health transactions, a sharp decline from the 14 that took place in Q1 2020.

“Looking back, those five deals made up the lowest home health total that we’ve had since we started tracking this data,” Mertz says. “But we’re back to business as usual, for the most part.”

In contrast to the second quarter, there were at least nine home health deals in Q3 2020.

Among the known deals: The Pennant Group Inc. (Nasdaq: PNTG) announced in September that it had acquired CMS Home Health Care, a Texas agency with locations in Brownwood and Coleman. Texoma Medical Center also acquired Northeast Medical Center Home Health in September.

In August, Actinium Healthcare Holdings announced its acquisition of Central Home Health Services of Texas Inc.

There are multiple reasons for the spike in home health deals.

As noted in previous M&A updates, home health providers are feeling increasingly confident in their ability to navigate the Patient-Driven Groupings Model (PDGM) and its impact on cash flow. Another factor is the home health-to-hospice recalibration happening among the large strategic buyers.

“Strategic buyers have been focused on tri-locating home health, home care, and hospice in their markets, with priority on hospice,” Mertz said. “But many of them have rapidly expanded into hospice now, and hospices are still hard to find. In turn, attention is returning to home health, which is maybe an easier way to penetrate new markets.”

Apart from the reported deals, Mertz Taggart is also hearing of several additional conversations taking place, perhaps laying the groundwork for a blockbuster Q4 and 2021.

Hospice Demand Remains High

The hospice subsector again dominated in-home care transactions, as it has since the start of last year.

In all, there were at least 16 hospice-related deals in Q3 2020, two more than the 14 transactions reported during the previous quarter. Overall, Mertz Taggart has logged more than 150 hospice transactions since Q1 2017.

Private equity was the driving force behind at least 11 of last quarter’s hospice deals.

“PE buyers are hungry for hospice,” Mertz says. “While past interest has partly been tied to home health uncertainty, some of the new interest may be linked to emerging Medicare Advantage opportunities for hospice providers.”

At the end of September, PE-backed Three Oaks Hospice purchased Hospice Partners of Kansas, marking the Texas-based company’s entry into the Kansas and Missouri markets. Also in September, PE-backed Bristol Hospice completed its acquisition of Remita Health, the provider’s seventh acquisition of 2020.

Meanwhile, Traditions Health expanded into two new states in August, with the acquisitions of Faith Hospice of Oklahoma and Embrace Hospice of Georgia. Traditions followed up on those deals by purchasing Physician’s Choice Hospice and Palladium Hospice the following month.

Home Care Nears Possible Boom

Compared to the home health and hospice markets, home care M&A activity was slow in the third quarter. Mertz Taggart tracked just two deals, down compared to Q2’s five transactions and Q1’s seven transactions.

“There’s still a lot of demand in this area,” Mertz says. “There just haven’t been a lot of attractive assets on the market, and many of these transactions don’t get reported.”

While it didn’t close in Q3, there was one major home care-related acquisition agreement announced. In a deal expected to close before the end of 2020, The Providence Service Corporation (Nasdaq: PRSC) announced on Sept. 29 that it had entered into a definitive agreement to purchase home-based care company Simplura Health Group for an enterprise value of $575 million. New York-based Simplura operates home health and non-medical personal care agencies in seven states.

“Above all, Simplura advances our vision to create the nation’s preeminent social determinants of health company,” Daniel Greenleaf, president and CEO of Providence, said after the agreement was announced.

It’s worth mentioning that Simplura generated $463 million in revenue and $49.6 million in Adjusted EBITDA for the 12-month period ending June.  This translates to transaction multiples of 1.24x revenue and 11.6x adjusted EBITDA.

“Providence is trading at about 22x EBITDA, so this transaction allows them to both be aggressive on their valuation and still be very accretive to their earnings,” Mertz commented.

Despite the slow Q3 for home care, Mertz Taggart believes Q4 will bring record or near-record deal volume when more assets come to market.  “There are a lot of home care transactions currently in process across the country, with a goal of closing before year-end.  They may not all get across the finish line by December 31, but that’s the objective,” Mertz suggested.

The 2021 Picture

Hospice is still hot, home health M&A is picking up and home care is sprinting into Q4. All of that suggests that 2021 will be an exciting, action-packed year for deal-making, especially if the COVID-19 situation is partially resolved through a publicly available vaccine.