PE firms aim to grab share of consolidating anesthesia services market - industry sources10 June 2012

Anesthesia services providers are seeing heightened interest from private equity firms seeking to buy into the space, as it consolidates over the next three to five years, according to several industry sources.

Deals with at least two large, regional anesthesiology groups looking only at PE buyers are expected to close by the end of this quarter, said a source claiming knowledge of the processes. One Southwest-based group is expected to garner around USD 100m in a deal similar to MTS Health Investors’ purchase last month of Florida Gulf-to-Bay Anesthesiology Associates, the source said. Another Northeast-based group is expected to sell within a similar time frame, he added, noting both groups employ at least 50 to 100 physicians.

Historically, consolidators in the space have been limited to a handful of large, strategic buyers, namely EmCare (part of Emergency Medical Services Corp), MEDNAX, Sheridan Healthcare and Team Health, according to the source, an industry banker and two industry executives. But PE firms have been showing increasing attention to the highly fragmented industry, and they can offer certain advantages over strategic buyers, namely the option for owners, typically physicians, to retain equity, as opposed to selling 100% ownership, they said.

Team Health, Sheridan, MEDNAX and EmCare combined command only 10% of the market, and many PE firms are looking to grab their share of the local groups and hospital-based physicians that make up the remaining 90%, the sources said. As the general decline of the economy and health reform drive consolidation, several “very large” groups are expected to emerge over the next few years, they added.

Additionally, margins for anesthesiology, possibly the highest paid specialty, “will not last forever” as health care aims to reduce costs, the source familiar said, so there is “a lot of pressure on smaller players to partner up with larger groups,” due to potential reimbursement cuts.

While many smaller players are selling out to large strategic buyers, which can offer the “retirement option,” many larger sellers are looking to PE buyers, as they focus less on a 100% cash-out and more on stable, equity-owning physicians who can better weather potential health reform turbulence, and ultimately go toe-to-toe with the larger competitors, the source said. These platform buys can be successfully grown organically or via acquisitions, although the industry holds ample opportunities for the latter, according to the source.

A year ago, Clayton Dubilier & Rice acquired Emergency Medical Services Corporation (EMSC) for USD 3.2bn, shortly after North American Partners in Anesthesia (NAPA) was acquired by Moelis Capital for USD 150m. EMSC provides ambulance services and a range of outsourced physician services, including anesthesia. NAPA, which was one of the largest independent anesthesia services providers, just completed its first acquisition since the investment, the banker noted.

Company executives from MTS and Florida Gulf-to-Bay recently told this news service MTS acquired a majority stake in the Tampa, Florida-based provider to use its base of 55 anesthesiologists and 125 certified registered nurse anesthetists (CRNAs) as a platform to expand via buys. Other PE firms with anesthesia services portfolio companies include The Beekman Group (TBG Anesthesia Holdings) and Triton Pacific Capital Partners (Aisthesis), according to the banker.

A group of 50 or more physicians is considered a larger regional player, and those on the smaller side typically have around USD 25m-USD 30m in revenue. Regional players with 100-200 or more physicians can reach upward of USD 150m in revenue, the source explained. Fewer than two dozen large regional groups are scattered throughout the country, he and the banker noted.

The source noted Greater Houston Anesthesiology as one of the largest independent groups in the country, with more than 300 anesthesia “providers,” according to its website. Oregon Anesthesiology Group, which employs more than 220 “physicians,” according to its website, is another large group, said the source and first executive.

The market is made up mostly of groups under USD 25m, many with under USD 5m in revenue, they added. The smaller players are earning multiples of around 5x-7x EBITDA, with platform deals earning more, the source said. The stock prices of public companies such as MEDNAX and Team Health peaked close to 11x EBITDA in the past year and are now averaging around 8x-9x EBITDA, the source added, noting the Moelis-NAPA deal was “a little less” than a 7.5x EBITDA multiple.

Typical EBITDA margins are around 15%-25%, according to the source, and can fluctuate depending on the number of physicians versus CRNAs, as anesthesiologists earn on average USD 300k-700k or more a year, while CRNAs typically earn around USD 100k-200k, according to the source.

MEDNAX, based in Sunrise, Florida and one of the largest players in the space, just announced plans to spend USD 200m on anesthesia services acquisitions in 2012. Knoxville, Tennessee-based Team Health and Boca Raton, Florida-based Sheridan Healthcare have made recent buys as well. MEDNAX, as seen through recent purchases, has shown a desire to expand in new markets, with its recent acquisition of Pinnacle Anesthesia giving it entry into the southeastern US, the source pointed out. Sheridan’s recent buys seem to indicate it is looking more in core markets, he said.

The source predicted mergers among the largest players could happen “at some point” but not likely near-term while the market remains extremely fragmented.

The source noted Banner Health’s acquisition of Loveland Anesthesia bucks the hospital industry’s trend of outsourcing anesthesia services, although he didn’t anticipate it to be a significant near-term trend.

The fourth quarter of 2011 was one of the most active in terms of anesthesia M&A, with 10 total transactions, the source said.

By Deborah Balshem in Fort Lauderdale, Florida

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