In a significant move, Halifax, a prominent middle market private equity firm, recently announced its strategic decision to acquire the Worldwide Home Care division of Sodexo. This move brings under its wing the globally recognized home healthcare Comfort Keepers brand in the United States and more than 700 locations worldwide, including countries such as the U.S., U.K., Ireland, Norway, Denmark, Sweden, and France.

The Rise of Home Healthcare

According to Andre Ulloa, Partner, Executive Advisor, and Founder at M&A Healthcare Advisors, home healthcare companies have emerged as highly attractive targets for private equity buyers. In an interview with McKnight’s Home Care Daily Pulse, Ulloa highlighted the growing trend of people seeking care within the comfort of their homes, leading to the surge in demand for home care services globally. 

Private Equity Investments in Home Health

Private equity firms have strategically tapped into this burgeoning market. In 2022, private equity investments in the healthcare sector reached their second-highest mark ever, with home health accounting for 37 out of 628 private equity deals. The appeal lies in the flexibility and personalized care that home healthcare services offer to patients.

Addressing Concerns and Ensuring Quality Care

While private equity models often prioritize efficiency and cost-cutting measures, concerns have been raised regarding their potential impact on patient care. However, Ulloa reassures that consumers are safeguarded by regulatory bodies such as the Centers for Medicare & Medicaid Services. These regulations ensure that patient services remain paramount, even amidst strategic cost-cutting initiatives.

Future Outlook: A Focus on Home Care Transactions

Ulloa anticipates a surge in private equity home care transactions in the near future. “We haven’t seen much private equity activity in the last year or so, only because there’s been a lot of uncertainty around the general economy, and the cost of capital has been so high.” Ulloa says, continuing, “But I think most folks would agree that there’s a lot of capital sitting on the sidelines waiting to be deployed. And when it does get deployed, this will be a focus market for those dollars.”

Despite a brief slowdown due to economic uncertainties and high capital costs, there is a significant amount of capital poised for deployment. As the economy stabilizes, the home healthcare market is expected to be a focal point for these investments.

Conclusion: Halifax’s Strategic Move

Halifax’s impending acquisition of Worldwide Home Care, set to conclude in the fourth quarter of 2023, marks a pivotal moment in the intersection of private equity and home healthcare. This strategic move underscores the industry’s shift toward providing quality care within the homes of patients, supported by the expertise and financial strength of private equity firms. As the landscape evolves, it is essential for stakeholders to remain vigilant, ensuring that the core focus remains on delivering exceptional and compassionate healthcare services to those in need.

For home healthcare owners who are considering an M&A transaction, M&A Healthcare Advisors can provide the guidance you need to reach your goals. 

McKnights Home Care
By Adam Healy

Home health and hospice giant Enhabit disclosed late Wednesday that it is seeking strategic alternatives in the form of a merger, sale, acquisition or other transaction, following continued declines in its revenues and stock price. Poor leadership and corporate pressure led to the move, according to one financial expert.

“They don’t have the leadership or the proper strategy for growth, and now there’s just too much pressure being put on them by shareholders,” said Andre Ulloa, executive advisor at M&A Healthcare Advisors, speaking to McKnight’s Home Care Daily Pulse.

He noted that many investors are critical of the board and its business strategies. “How is it that LHC Group or Amedisys or even some integrated hospital systems are growing in this market and Enhabit isn’t? I think it all comes down to leadership and management,” he said.

Enhabit isn’t failing, it’s just not fulfilling expectations, another expert said.

“It’s not a fire, it’s just that they’re not growing and they’re not making money,” said Tom Lillis, a partner at healthcare merger and acquisition advisory firm Stoneridge Partners, in an interview with McKnight’s Home Care Daily Pulse. “I think they’re getting better, but I just think the leadership team ran out of runway, particularly from their investors.”

The move to explore a strategic move was not unexpected, Lillis pointed out.

“[Growth has] been flat in an overall growing-opportunity market,” he said. “When you look at their numbers year over year, it’s just been a struggle, and their predictions for the future are worse.”

Enhabit reported year-over-year declines in profits and revenues in the first quarter of 2023. It reported a profit loss of $74 million in the second quarter. The company’s stock price has declined almost 50% since going public, urging some investors to call on Enhabit to sell.

“Enhabit didn’t meet its earnings expectations for the second quarter of this year, so as a result, the valuation is less if you’re looking at it from an earnings perspective,” Ulloa noted.

In a second quarter earnings call earlier this month, Enhabit CEO Barbara Jacobsmeyer cited the shifting consumer enrollment from traditional Medicare to Medicare Advantage as a key reason for the company’s declining performance. Other market events, such as a proposed behavioral rate adjustment by the Centers for Medicare & Medicaid Services and ongoing workforce shortages are all perceived headwinds.

What’s to come
There remain opportunities for Enhabit to grow, Lillis said. The company’s hospice arm, he noted, hasn’t expanded much year over year — a good area for future growth. The segment’s net service revenue increased by 1.5%, but adjusted earnings before interest, taxes, depreciation and amortization shrank more than 22%, according to its second quarter earnings report.

Enhabit’s solicitation of strategic alternatives may yield an acquisition in the form of a buyout, according to Ulloa. He predicted that the home care giant will either get completely absorbed by a parent company, or exist as a privatized subsidiary, operating as a support or integrated component of a larger home health company. The buyer could likely be an insurance vendor, following market trends such as UnitedHealth’s recent acquisitions of LHC Group and Amedisys, he said.

Private equity firms observing the growing expansion and success of home healthcare may also be interested, said Lillis. He noted that this process will be orchestrated by investment banking company Goldman Sachs.

“I think this is a great opportunity for whoever would purchase,” Lillis said. “There’s still a number of folks out there with dry powder for investment, but this is going to be a large bite. It’s going to be interesting to see who comes to the table and how they propose.”

McKnights Home Care
By Liza Berger

Optum’s all-cash bid for home health and hospice provider Amedisys Monday may be impossible for shareholders to resist, according to home care mergers and acquisition experts.

“It’s awfully hard to turn down a 25% increase in valuation,” Tom Lillis, a partner with Stoneridge Strategic Consulting, told McKnight’s Home Care Daily Pulse. He was referring to the difference between the stock’s closing price of $79 on Friday and the $100 per share offered by Optum.

Amedisys revealed Monday morning that Optum, a unit of UnitedHealth Group, placed an unsolicited offer to acquire all of the outstanding shares of Amedisys’ common stock for $100 per share.

“It’s definitely a better deal for Amedisys shareholders,” noted Cory Mertz, managing partner with Mertz Taggart, to McKnight’s Home Care Daily Pulse in the mid-afternoon Monday. “The stock is up 15% since the deal was reported, adding about $400 million in shareholder value, just on the announcement.”

The news appeared to take observers, including Mertz and Lillis, by surprise. Last month, Amedisys agreed to merge with Option Care Health, a provider of home and alternate site infusion services. The all-stock transaction values Amedisys at approximately $3.6 billion, including the assumption of net debt.

Besides the terms, there are other reasons to like the Optum offer, said Andre Ulloa, a partner and executive adviser with M&A Healthcare Advisors.

“The reason that the Optum deal is more attractive, other than it being a better price, is because Optum is a larger infusion pharmacy, specialty pharmacy and pharmacy benefits manager (PBM),” he told McKnight’s Home Care Daily Pulse in an email. “This deal will increase the potential deployment of drug therapies throughout OptumRx, and with UnitedHealth Group as the parent company, the expansion of services is virtually limitless. Furthermore, based on how UnitedHealth Group has handled the LHC Group integration, Amedisys should be able to retain control over its brand as it continues its aggressive grow plan.”

Concerns about antitrust violations?
The one cloud hovering over the new proposed deal is possible antitrust scrutiny by the Federal Trade Commission.

“There is definitely risk in this deal, and the stock is priced as such, trading at $91/share versus the $100/share offer from Optum,” Mertz said. “The biggest concern is the FTC and potential antitrust issues. The argument against antitrust is that the combined companies will not have more than 10% of the market.”

Lillis agreed that the FTC likely would take a close look at the deal, as it did for Optum’s acquisition of LHC Group, which closed nearly one year after Optum disclosed it was buying LHC Group.

“I don’t know if it’s [Optum-Amedisys deal] ever going to get through the FTC,” Lillis said. He pointed out that an Optum acquisition of Amedisys might raise the antitrust red flag of “vertical harm.”

“Those are two of the largest providers and if you overlay them on the map there’s significant overlap,” Lillis said.

While a deal would trigger a close look, it is not likely to stop the deal, Ulloa said.

“This transaction may trigger a Hart Scott Rodino (HSR Act) antitrust review, but it will be approved given what has passed in healthcare over the last decade,” he said. “For example, there are clear concentrations of ownership when it comes to pharmacy.  If UnitedHealth Group has been able to grow its pharmacy subsidiary (OptumRx) to the third largest in the country, behind CVS Health and Express Scripts, it is unlikely that they are precluded from growing their home health subsidiaries, which represent a small allocation of the home health market.”

Option Care Health response
In the meantime, all eyes are on Option Care Health to see if they make a counteroffer. The company reiterated the strength of its agreement Monday morning.

“Option Care Health’s previously announced definitive merger agreement with Amedisys delivers significant value to Amedisys and Option Care Health stockholders, a high degree of certainty in obtaining the required regulatory approvals due to the complementary nature of the parties’ businesses, and benefits patients, providers, payers and care teams,” the company said in a statement. “Our compelling all-stock transaction, expected to close in the second half of 2023, allows stockholders of both companies to participate in the upside of the combined company, which will be a differentiated leader in home health and alternate site care with unmatched scale and a unique cash flow profile.”

Even if Amedisys moves forward with Optum, “this looks like a win across the board,” Ulloa commented. “The parent company (United) will enhance its market share and increase efficiencies, and the target company (Amedisys) will now have an enormous resource for capital improvements, while maintaining their identity in the public. Even Option Care wins. It’s not too shabby to get over $100 million in break-up fees.”

Editor’s note: Story has been updated to include statement from Option Care Health.

McKnights Home Care
By Liza Berger

“This is a vertical partnership between Option Care [and Amedisys],” he told McKnight’s Home Care Daily Pulse in an email. “If it creates value, which we expect it will, then they are a much larger and valuable target for an insurer.”

The Amedisys board believes it will command a higher price per share if it becomes more of an integrated post-acute system, he added.

“I would agree, and I think that it won’t be too far down the road before we hear about an acquisition contemplated between Option Care/Amedisys and a nationwide insurance company,” he said.

Such a scenario would not be surprising given two other large home health firms have been the targets of health insurance companies. Specifically, Humana purchased Kindred at Home (and later divested its 60% stake in the hospice and personal care units). UnitedHealth Group bought LHC Group.

What Amedisys gets out of the deal is still a bit of a mystery for Tom Lillis, a partner with Stoneridge Strategic Consulting, however. He pointed out that Amedisys will only retain a 35.5% stake; Option Care Health, which is headquartered in Bannockburn, IL, will own 64.5% of the company. The all-stock transaction values Amedisys at $3.6 billion.

“Where are the synergies? It’s not immediately apparent from the Amedisys side,” Lillis commented to McKnight’s Home Care Daily Pulse. “It has more questions than answers.”

The chance to cross-sell seems the most likely reason for Amedisys’ interest, he added.

“When you pull back it’s got to be the opportunities to cross-sell, more patients, more touchpoints,” he said. “That’s my assumption from an Amedisys standpoint.”

Ulloa had a similar view. He called the merger “an excellent business move in terms of vertical integration.” He pointed out that infusion pharmacy is the only pharmacy area that has seen increased value in recent years.

“Infusion pharmacies can bill Medicare at higher rates, based on Part B,” he noted. “Also, the dispensing of these therapies is much more complicated, making an infusion pharmacy more like a healthcare provider than a dispensing hub.”

So merger or acquisition?

“At this point, it is an announcement to merge,” Ulloa said. “It is being framed as an ‘acquisition’ by Option Care, but considering that the Amedisys brand will continue, it will be conducted through stock allocations, and there will be an integration of senior management, it has to be considered a merger in my opinion.”

McKnights Home Care
By Diana Eastabrook

Anxiety over another interest rate hike and fears over the stability of the U.S. banking system could derail large home care and hospice deals in the short term, according to mergers and acquisitions experts.

Private equity groups, which have become big buyers in the space, typically finance deals partly with debt. However, M&A experts say it could get harder for PE buyers to finance those deals if the Federal Reserve Board continues to hike interest rates and banks tighten credit.

“At the high end of the market — let’s say transactions in the $100 million to $1 billion plus range — values have come down as capital has gotten more expensive,” Cory Mertz, managing partner at M&A advisory firm Mertz Taggart, told McKnight’s Home Care Daily Pulse. “At this end, all transactions are highly leveraged. So we’re seeing fewer large platform transactions.”

After back-to-back blockbuster years for home care and hospice deals, acquisitions fell more than 40% last year to pre-pandemic levels, according to Mertz Taggart. Now rising interest rates, which have recently caused the collapse of two U.S. banks, potentially threaten future deals. But, not all of them, according to experts.

The fundamentals of home care and hospice, including an aging U.S. population and strength in the Medicare program, make the industry attractive for investors hoping to enter the space or expand their footprint in it, they say. Andre Ulloa, partner at M&A Healthcare Advisors, told McKnight’s Home Care Daily Pulse that PE buyers and many strategic corporate buyers are also flush with cash they need to deploy in the form of deals. He predicts those firms are likely to be acquirers of smaller companies, and deals could be structured a bit differently.

“The underwriting might be a little tighter and there might be a little more scrutiny than there has been,” Ulloa added. “But I don’t think anything’s going to stop a bank from underwriting if there is a good buyer that is a good business.”

Large home care firms, including Amedisys, reaffirmed their intentions to hunt for deals in 2023. Tom Lillis, a partner with healthcare advisory firm Stoneridge Partners Strategic Consulting, told McKnight’s Home Care Daily Pulse he also expects to see M&A activity remain relatively strong for home care and hospice over the next couple of quarters. However, he admitted the prospect for deals later in the year is less certain, especially among private equity investors.

“When that money that exists now gets deployed, where is the next tranche of funds coming from,” Lillis asked. “There is so much unknown. Will they be able to raise funds?”