'It’s quantum shift time,' analysts say

Friday, June 14, 2013

YARMOUTH, Maine – A pair of recent M&A transactions on opposite coasts illustrates what analysts have long predicted: Competitive bidding will drive market consolidation, they say.

With prices on the downswing, companies need to build scale, say analysts.

“It’s quantum shift time,” said Rick Glass, president of Steven Richards & Associates.

In May, Mount Vernon, N.Y.-based Landauer Metropolitan merged with Plainview, N.Y.-based Allcare Medical to create one of the largest providers in the Northeast. Also in May, Boise, Idaho-based Norco acquired two providers on the West coast: Care Medical and Walgreens Respiratory Services.

Large regional providers are, in essence, protecting their franchise. If they won contracts in a certain market, they are strengthening their commitment to that market by acquiring smaller providers. If they didn’t win a bid, they are looking to acquire the smallest bid winner they can find.

“I call it musical chairs,” said Patrick Clifford, managing director with The Braff Group. “There’s a lot of dancing going on as July 1 approaches and we are seeing who’s going to have a seat.”

With an average reimbursement cut of 45% in Round 2, staying in or near your footprint makes sense, say analysts.

“There’s only so much cost you can cut,” said Jonathon Sadock, managing partner with Paragon Ventures. “By scaling within your geography and making better us of existing infrastructure, you can replace those lost profit dollars from competitive bidding.”

Ultimately, however, the large regional players still need to make money if they want to compete against the nationals, all of which accepted multiple contracts, say analysts. While American HomePatient has remained mum, Rotech Healthcare has previously said it planned to fill in a few gaps.

“Rotech and American HomePatient have to be looking at what they are going to be doing longer term,” said Don Davis, president of Duckridge Advisors. “But, there are some very powerful regionals. If they are able to make some money they are going to look very nice.”