Flurry of Recent Transaction Activity's Impact on the ASC Industry: Q&A With Kevin McDonough of VMG Health

In just the past few months, there has been a significant number of high profile ambulatory surgery center transactions, including the announced acquisitions of National Surgical Care by AmSurg, Foundation HealthCare and NovaMed. Kevin McDonough, senior manager at VMG Health, discusses the catalysts for these deals and what they mean for the ASC industry and freestanding surgery centers.


Q: What is driving these significant acquisitions of large ASC management and development companies?


Kevin McDonough: What we're observing is support in the market for a high level of transaction activity — the demand for acquisitions is high. There is a significant level of pent-up demand. You've had, over the last couple of years, these public and private-equity backed ASC management companies sitting on the sidelines for the most part in response to economic uncertainty and tight credit markets. Despite the desire and need for growth, unique market dynamics have prevented these large scale acquisitions. Market dynamics have improved and financing is more readily available so now it seems the right time to aggressively pursue these transactions.


Q: What is the motivating factor behind the acquisitions?


KM: The overriding factor behind these acquisitions is the desire for these ASC management and operating companies to exhibit growth to their investors. ASCs are very attractive from an investment perspective as they generally exhibit high levels of consistent cash flow. We're increasingly observing these companies targeting markets where either they have a strategic presence or they are able to acquire a critical mass of ASCs that are located in a particular market. As the ASC market continues to mature and margins are squeezed, they're looking to make acquisitions not only of centers they can hopefully improve upon but they're looking at acquiring ASCs in a market where they can potentially use economies of scale to increase market presence and obtain more favorable managed care contracting leverage, physician relations, etc. Also, if they're a larger presence in a particular market, they're going to be in a much better strategic position to be a recognizable force if an accountable care organization does take hold in that market.


We're presently observing this trend with the ASC management and operating companies that we're working with. These companies are looking to acquire centers in targeted markets. It wouldn't be one-off centers where they don't have any other facilities. It would be a targeted market presence where they would go in and look at 2-3 centers in a particular market and look to acquire those centers.


Q: Considering all of these recent transactions, what's the impact on valuation?


KM: We haven't seen a whole lot of movement of the top end of valuation range for high quality ASC targets. A lot of these [larger, recent transactions] are transacting at the 8.0x or 8.0x-plus EBITDA multiple range. That premium, over a typical 6.5x or 7.0x multiple, is related to the fact that they're buying a whole portfolio of ASCs as opposed to a single ASC. While it does support the fact that the acquisition multiples are not declining at all in this mature ASC environment, I think it also doesn't necessarily mean they're going up significantly.


It is evidence of what you would expect to see in a maturing market — consolidation. The ASC market is transitioning from a very fragmented industry, and moving towards greater consolidation. The maturation of the industry is taking its toll on the profitability of centers as they struggle with reimbursement pressure and greater competition for physician volume. Many ASC management companies are keenly aware of the challenges that lie ahead and view the present as an opportune time to seriously entertain consolidation and sale of their ASCs.


Q: What does all of this activity mean for freestanding ASCs?


KM: If you're a freestanding center and you're in a market that a national management company is already active in, then you can likely consider yourself a probable target for acquisition. It's probably one in which if you are looking to sell, they would entertain the thought or they might very well approach you. If there are other acquisitions happening in your market, it's a good likelihood that they'll be targeting you in the near future. You should be in a good position from a valuation perspective because we haven't seen a whole lot of movement at the top end of that acquisition multiple range for high-quality ASCs.


Learn more about VMG Health.


Read more from VMG Health:

- 5 Ways an Ambulatory Surgery Center's Size Impacts its Business


- What Can Surgery Center Physicians be Paid for Co-Management: Q&A With Jen Johnson of VMG Health


- 6 Risk Factors That Have a "Very High" Impact on ASC Value

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