Air Products steps on the gas, pays $165 million for AHS

Thursday, October 31, 2002

CONSHOHOCKEN, Pa. — In one of the largest deals ever involving an independent home medical equipment provider, Air Products, a $5.7 billion industrial gas and European homecare giant, acquired American Homecare Supply last month for $165 million in cash.

For the HME industry, the deal is more proof that the mergers and acquisitions market isn't going to slow down anytime soon. In fact, this deal reinforces the notion to investors that the home medical equipment market is "the place to be," said mergers and acquisitions expert Richard Davis, vp of Paragon Ventures.

"When you have Lincare and Apria doing acquisitions, that is one thing," Davis said. "But when you have a company getting into the U.S. market in a big way, with a platform that will allow them to compete nationwide and do additional acquisitions, it tells venture capitalist that this is a place you can put your money."

For independent providers, the deal means that despite the threat of competitive bidding, inherent reasonableness and and "everything else that might be hanging out there," there is still a market, said Mario Lacute, president of Seeley Medical in Andover, Ohio.

Air Products certainly saw it that way. With a 50 year history in homecare and the number two provider of home respiratory and infusion services in Europe, Air products had eyed the U.S. market for several years. Originally, the company intended to enter the U.S. via a smaller acquisition. But when its attempt to acquire BOC gases several years ago fell through, it decided to make a bigger play, said Bob Gadomski, group vp of gases and equipment.

"Going forward, I don't want the investment community to think we are going to go out and do a mega acquisition in this area," Gadomski said. "The prices are too high, and there are so many opportunities of the smaller varieties — $10 million, $15 million and $20 million companies, and what I call micro acquisitions of a few million dollars."

Among other things, Air Products acquired AHS for its relationship with payers, systems for collections and success at integrating smaller companies, said Karel Schroder, Air Products' vice president and general manager, Global Healthcare.

American Homecare Supply CEO Bob Cucuel and his executive team started rolling-up the company in August 1999. Through seven acquisitions of premier local providers, the team extended its reach from Boston to Washington. Medicare and Medicaid comprise 40% of its business and manage care 45%. Private and self pay generates the rest.

"The team's visions, has been to build a $300 million to $500 million provider that is contiguous, whether that is from New York to Los Angeles or east of the Mississippi," Cucuel said. "Now we'll be second to none in the industry, even compared to Apria, as far as the corporate resources we have."

Cucuel will continue as CEO of American Homecare Supply, and his management team will remain in place.

With the industrial gas business slogging through low single digit growth, the home medical equipment market's 7% to 10% annual growth looks very good to Air Products and its competitors — Praxair and Air Liquide — who have bought their way into the market over the past several years.

Air Products expects AHS to grow by 11% to 12% a year, and plans to boost the company's home respiratory therapy business by 1% to 2% a year. Going forward, Air Products will look to acquire companies with a higher mix of home respiratory business than AHS's 45%, Gadomski said.

Talk of national competitive bidding for HME and cuts to the average wholesale price, don't phase Air Products. For starters, of AHS's $110 million in revenue, only $1.5 million comes from respiratory meds. As for competitive bidding, Air Products views it as an opportunity to acquire companies that don't want to deal with it, Cucuel said.

Added Gadomski: "We thought it was a good market a few years ago. We think it's a good market now, and we think it will be a good market in the future." HME