2005 looks like another good year for M&A

Sunday, November 21, 2004

November 22, 2004

YARMOUTH, Maine - It doesn’t look like the red hot mergers and acquisition market for home medical equipment companies will cool down any in 2005, especially now with Rotech back in the game.
Additionally, with large Medicare reimbursement cuts scheduled for 2005, Apria, Lincare, Air Products and other larger providers must prove to Wall Street that they are still growth companies. To do that, they’ll have to acquire businesses to offset the cuts, say industry M&A experts.
“The buyers I’ve talked to say they don’t intend to slow down, and we’ve had some new players come into the market in the last six months, and that means a strong 2005,” said Jonathan Sadock, CEO/partner, Paragon ventures, Wayne, Pa.
For most of the past few years, while Lincare and Apria snapped up independent providers right and left, Rotech sat on the M&A sidelines retooling operations.
Earlier this month, Rotech announced that it had hired away from Apria the highly respected acquisitions expert Jeff Freedman. At Apria, Freedman worked under Bob Abood as vice president of acquisitions. In 2004, Freedman handled only a portion of Apria's 26 acquisitions, mostly the smaller ones, according to Apria.
Prior to being hired by Apria, Freedman, who is an attorney, honed his M&A skills at Steven Richards & Associates in Tarpon Springs, Fla., and before that at Lincare. At Rotech, he’ll serve as chief development officer and be responsible for acquisitions and establishing new branches.
“He is a seasoned, experienced, well known commodity, so I think that says Rotech should have a pretty effective program,” said one industry watcher.
For 2005, Rotech has budgeted about $25 million for acquisitions, say industry sources.
Typically, to accommodate reimbursement cuts, a buyer will adjust their bid downward. That will probably happen in 2005, but it’s not a given. While the cuts will exert a downward pressure on valuations, a steady and increasing demand could off set that.
“We would not be too surprised to see valuations similar to what they have been,” said Bob Leonard, an associate with the Braff Group in Pittsburgh, P.a.
Even the market for neb-med companies, which all but disappeared this year due to uncertainty surrounding Medicare reimbursement, has rebounded. That’s because earlier this month, CMS established a monthly $57 dispensing fee for respiratory medications. That allows potential buyers to put a value on what kind of profits a med company will generate in 2005.
“It’s less lucrative than it had been, but less onerous than it might have been,” Leonard said. “It’s worth it to be in the business and that was uncertain before. It’s easier to plan now that the facts are out.”