M&A roundup: Private equity charges into hospital market

An odd thing is happening in the hospital industry: Deal-making is occurring at a torrid pace, but they are not the traditional sort of transactions that have dominated over the past couple of decades.

"Most of the active investment bankers I've spoken to in the last year have seen more pending closed and potential hospital transactions in the last year than in the past decade combined," said Shane Passarelli, a senior vice president with Healthcare Finance Group, a New York-based firm that provides credit to healthcare entities.

 But rather than mergers of equals, there have been a lot of outright hospital acquisitions, according to Passarelli. "You're seeing all cash deals or cash and stock combinations, but rarely see one private company exchange stock with one another in a merger," he observed. "I wonder where the art of the merger is. You're seeing a lot of 'A,' but not a lot of 'M.' "

Moreover, the deals have involved far more private equity firms, including ones that have rarely been involved in the healthcare industry. But there has been an acknowledgement that hospitals are now too large a part of America's financial machine to ignore.

"It's historically not been a sexy industry; it's a complicated industry, and in the past hedge funds have been reluctant to be involved with transactions," said Michael Lane, managing director of Navigant Capital Advisers in Chicago. "But as they started (looking at hospitals) and now understand the revenue streams that scared them off, they understand that this is going to be a giant piece of the economy."

Passarelli concurred. "There is a huge overhang of private equity money that has to go to work," he said, adding that hospitals are already big businesses on their own, with below $75 million in annual revenues. "Hospitals present an opportunity for these funds to invest their dollars and write a large check."

A poll released late last year by Pepperdine University of more than 300 private equity executives said 11 percent planned to invest in healthcare in the near term. Although that's not a huge number, fewer than 5 percent had said they planned to invest in healthcare during a previous survey.

The following six deals show how private equity firms are getting in deep with hospitals:

Cerberus acquires Caritas Christi Health Care

Ascension Health forms joint venture with Oak Hill

Leonard Green acquires Prospect Medical Holdings

Warburg Pincus goes for coffee

Vanguard purchases Detroit Medical Center

Irving purchases National Surgical Hospitals