Megadeals, trading multiples, and overall deal values in the sector have not been immune to interest rate hikes and fears of an economic downturn. However, transaction volumes continue to increase due to enhanced attention on private equity (PE) platform add-ons during this challenging macroeconomic rate environment and continued sector resilience.
Payer-provider convergence and headline-grabbing investments from non-traditional players underlie the broader evolutionary theme of the sector– fee-for-service focused models are in the rear-view mirror and players are diving in and embracing value-based care throughout the ecosystem.
These factors, along with the continued large levels of corporate cash and PE dry powder, lead to a continued strong outlook for health services deal volumes in 2023.
Health services deal volumes increased further from levels seen in 2021, but have softened thus far in Q4-22. Year-over-year deal volumes increased in each quarter through Q3-22, though some pullback has been seen in Q4 through November 15 (251 announced deals in Q4-22 through November 15 versus 307 in the same period in 2021). While deal volumes have continued to increase, deal values have declined from the peak set in 2021, a function of smaller value roll-up and platform add-on transactions representing a greater portion of activity in the current year.
Industry-wide enterprise value (EV) to EBITDA multiples have also declined from heightened levels seen at the end of 2021. As of November 15, the average multiple across health services sub-sectors was 14.4x, down from 15.9x as of December 31, 2021 and 14.9x as of December 31, 2020. Multiples dropped in four of the seven sub-sectors whose multiples we track, led by outsourcing (down from 19.2x to 15.0x) and managed care (down from 17.3 to 14.2).
Home health & hospice continues to be a sub-sector driving transaction value in 2022. This was one of only two sub-sectors that saw growth in announced deal value from 2021 levels, as pandemic-driven interest in alternative and patient accessible care models continued to be a key theme. There were 114 home health and hospice deals in the 12 months ending November 15, contributing to a 74% increase in deal value from 2021. This growth in deal value was driven by two megadeals – CVS’ acquisition of Signify Health for $8.0B and UnitedHealth / Optum’s acquisition of LHC Group for $6.0B.
Nearly half of announced deal value over the 12 months ending November 15 was from megadeals, consistent with the ratio seen in 2021. The 12 months ending November 15 had seven megadeals, including:
For select sectors, M&A volume retreated when compared to the historic levels experienced in 2021; however, the health services sector continued an impressive display of volume level through the last 12 months (LTM) ending November 15.
While traditional buy-side activity comprised a portion of this volume, an upcoming PwC study has identified the role divestitures can play in creating value in the healthcare sector.
PwC anticipates increased divestitures activity within health services for 2023 based on a variety of economic, regulatory and overall strategic repositioning. Given the variety of healthcare participants (e.g. for profit, not for profit and PE, etc.), each of the parties have varied processes for decision-making, but growth is the one goal they all share. As management teams assess growth, the power of strategically reviewing and aligning an organization's portfolio is critical to shareholder returns. Other key themes that can help create value through divestitures include: timely decision-making, actively embracing the process of divestitures and navigating inertial factors like entanglements.
“While sufficient ‘headwinds’ existed in the deal markets to potentially stall health services deal activity, the sector performed well and is poised to further expand volume in 2023 between reshaping portfolios, divestitures and a flurry of PE ‘dry powder’ to support the activity.”
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