M&A in 2002: more of same

Thursday, February 28, 2002

YARMOUTH, Maine - The mergers and acquisition landscape hasn't sprouted any blockbuster deals so far in 2002. That doesn't mean there aren't some in the pipeline (Rotech's on a number of tongues, as it was last year), but no one should expect this year's M&A market to differ significantly from last year's, industry watchers say.

There's a good reason for that: The same issues that have dogged the HME industry for the past several years - inherent reasonableness, competitive bidding, average wholesale pricing, etc. - haven't changed. As such, there's no basis to expect a major shift - good or bad - in M&A activity.

"It's a recipe for more off the same," said M&A expert Dexter Braff. "You should see continuing activity from nationals, regionals and new companies emerging with investment capital. The names may change, but we don't expect the categories and strategies they are pursuing to change at all."

That said, Bruce Burns, president of Affinity Ventures in Albuquerque, N.M., said he's seen more M&A activity so far this year than last but that companies are walking away from more deals than they are consummating.

"I relate it to how the NFL looks at football players," said Burns. "They want character and talent."

The industry no longer houses "gunslingers", companies content to buy and ask questions later. Due to increased government scrutiny, potential buyers now spend more time on due diligence, making sure acquisition targets are financially sound and compliant, Burns said.

Burns also said he's seeing more companies willing to look at companies outside their core competencies. With fewer quality respiratory providers on the block, acquirers are looking for opportunities to cross pollinate their existing product lines, with, for example, respiratory medications and mail order medical supplies.

In general, however, the bigger a company, the more home respiratory therapy it includes, the better the multiple. For example, a $5 million company that's 70% or more home respiratory therapy with an EBITDA of 25% or more, could command four to five times EBITDA, with five times being a home run. Less stellar companies should expect small multiples, industry sources say.

Look for two of the biggest regional players, Beaumont, Texas-based Home Care Supply and Conshocken, Pa.-based American Homecare Supply to lay low until they line up additional funding, possibly by the third quarter, industry sources say.

Among the nationals, some industry watchers thought Apria and Lincare would come out of the shoot a little faster in 2002, but that doesn't mean they won't continue to fill in their gaps.

"A lot of people are trying to figure out where the little diamonds in the rough are," said Schuyler Hoss, president, Northwest Healthcare Management, in Vancouver, Wash.

As far as Rotech goes, it's unlikely the national will acquire anything until parent company Integrated Health Services emerges from bankruptcy, or finds a buyer for it. Creditors won't stand for a company spending money before they are reimbursed. So, reports that Rotech has recently approached a number of smaller HMEs with eyes to acquire them may indicate that Integrated has found a potential buyer.

Rotech CEO Steve Linehan declined to comment on Rotech's situation but told HME News he might have something to say toward the end of February. HME