M&A market for HME: 'This is just the start of it'

YARMOUTH, Maine - Apria Healthcare isn't the only company who has put the home medical equipment industry back on the mergers-and-acquisitions map. In late May, Teijin Limited, a pharmaceutical and home healthcare company in Tokyo, bought Bakersfield, Calif.-based Braden Partners, which does business as Pacific Pulmonary Services. In January, Teijin also bought Amherst, N.Y.-based Associated Healthcare Systems. "I'm not sure it's a sea change," said Bob Leonard, an analyst with The Braff Group, an M&A firm in Pittsburgh. "But it's certainly the most favorable M&A news about the HME industry in a long time." Both Pacific Pulmonary and Associated Healthcare have a strong presence in the home oxygen market. Pacific Pulmonary has more than 100 locations, mostly in the West, and employs 1,000. In 2007, it had revenues of $133 million. Associated Healthcare has 11 locations in New York. The M&A market for HME first showed signs of heating up late last year when Philips Electronics bought Respironics for $5.1 billion. Before that, the market was lukewarm at best, thanks to uncertainty surrounding national competitive bidding. Why the shift? 2008 marks the first year that baby boomers are eligible to collect Social Security retirement benefits. Nearly 80 million baby boomers will become eligible for benefits in the next two decades, according to estimates. The race is on, industry sources say, to tap into that demographic. "They're looking at the industry and saying, 'I don't care how bad Medicare is right now, the baby boomer generation is here and they have money,'" said one industry source. The weak U.S. dollar has also helped make HME more attractive to foreign-based companies like Teijin and Philips, Leonard said. Industry sources believe the M&A market for HME will continue to heat up this year. Rumors are flying that Air Products is shopping around its healthcare division. In its earnings report for the second quarter of 2008, Air Products noted that the healthcare business, which includes oxygen, rehab and home infusion, "has operated below plan through the first six months of the fiscal year." Then it stated it is "evaluating strategic alternatives." Don't be surprised if the interest in HME increasingly comes from outside the industry, said one industry source. "A lot of investors are going to be thinking, 'Why did Blackstone acquire Apria?; there must be something there,'" he said. "There's a herd mentality on Wall Street. I think this is just the start of it."