Air Products: We’ve got to get out of HME

Sunday, August 31, 2008

LEHIGH VALLEY, Pa.--After months of rumors, Air Products announced in late July that it has put its U.S. healthcare business up for sale.

Earlier this year, in an earnings report for the second quarter of 2008, Air Products stated that it was “evaluating strategic alternatives” for its healthcare business.

“My sense is they were excited to get into the healthcare market and somehow got sidetracked,” said Rick Glass, president of Steven Richards & Associates, a mergers-and-acquisition firm in Tarpon Springs, Fla. “It’s a very small part of their overall business.”

Air Products, an industrial gas giant, entered the healthcare market in 2002 when it acquired American Homecare Supply for $165 million. At the time, American Homecare Supply CEO Bob Cucuel said he envisioned building a $300 million to $500 million company. In 2007, Air Products reported $271 million in U.S. sales for its healthcare business.

Cucuel left Air Products in 2005, and the healthcare unit has never been the same, industry watchers said.
“They brought in new management and they had no healthcare experience,” said one source. “They applied practices from other businesses onto the model, and it didn’t work.”

Air Products’ healthcare business comprises respiratory, home medical equipment and home infusion therapy. Opinions among industry watchers differ as to whether the business is worth more as a whole or as separate pieces. Some believe unbundling at least the red-hot home infusion business would be more profitable.

“They are a respiratory-focused company, but they have a nice array of home infusion, so there might be a different buyer for that,” said Bob Leonard, an associate with The Braff Group, a Pittsburgh-based M&A firm.

But Bruce Burns, president of Affinity Ventures, an Albuquerque, N.M.-based M&A firm, thinks selling the company piece-meal would be too cumbersome.

“I think the whole is worth more than the parts,” he said. “If they are going to exit, they are going to exit all at once.”

Last week, Air Products sold its A&J Care locations in New York and its COPD Services locations in New Jersey, fueling speculation that its healthcare business was in trouble.

Not so fast, said Jonathan Sadock, CEO of Philadelphia-based Paragon Ventures. He chalks up the move to a trend in the HME market on buyer initiated and localized deals.

“There was a willing buyer,” he said. “ This is not a fire sale.”

Air Products said it would record an impairment charge of $315 million in its fiscal 2008 third quarter results and report the healthcare business as a discontinued operation starting in the fourth quarter. It will continue to serve patients through its 80 locations until it is sold.