Becker's ASC Review spoke with Eric Major, director at Provident, and Praveen Suthrum, president of NextServices, a healthcare management company, about what a potential deal could look like, who the platform could sell to and what the ramifications of such a deal would mean to the industry.
Note: Responses were presented alphabetically and edited for style and content.
Question: What could a potential deal look like if Audax does sell Gastro Health this year?
Eric Major: As an early mover in the consolidation of the gastroenterology sector with a multistate presence, Gastro Health will be a highly sought-after platform by larger private equity firms and strategic buyers. The [mergers and acquisitions] markets within healthcare services have largely returned to pre-pandemic levels, which means Gastro Health should see valuation multiples from proposals in the 14- to 15-times range [or higher].
Praveen Suthrum: Recently, PE Hub published an article speculating two numbers for Gastro Health: $65 million in EBITDA and 15-times exit multiple. According to a Bain report on PE, the average exit EBITDA multiple in the U.S. was 11.5-times for 2019. Taking that as a baseline, the Gastro Health deal could range from $750 million to more than $1 billion.
Q: Who would be an interested buyer?
EM: The largest and most likely pool of potential buyers will be larger PE firms. Gastro Health will represent one of the first single-specialty GI platforms to go through a secondary transaction outside of [Jamison, Pa.-based] Physicians Endoscopy, and the company will appeal to firms that are seeking to make investments in well-established businesses with $50 million-plus in EBITDA. These firms have been sitting on the sidelines, as no single GI practice presents an opportunity of this size — Gastro Health will fit right within their investment parameters.
PS: Audax Private Equity would typically look for a middle- or upper-middle-market PE firm. For example, in 2016 Audax sold Advanced Dermatology to Harvest Partners, a middle-market PE firm that buys companies with enterprise value of $300 million to $5 billion. Gastro Health fits that criteria. Sometimes two or more firms come together to recapitalize the company, but that seems less likely for this transaction.
There's the other possibility of a GI platform buying out Gastro Health. Waud Capital-funded [Dallas-based] GI Alliance could be interested in the deal because of its strategic value. Such a merger would create a dominant position in GI for the company. Waud Capital is onto its fifth fund with a target of $1.5 billion but invests in businesses with enterprise value of $500 million or less. Gastro Health's value exceeds that criteria.
Among other PE firms in GI, H.I.G. Private Equity plays at the level that Gastro Health would likely exit into. However, given their recent investments in Michigan, buying Gastro Health might not fit into their original regional thesis. It doesn't seem like the other PE firms that are in GI invest in the range of Gastro Health's enterprise value.
There's also the possibility that the deal might be of interest to [Eden Prairie, Minn.-based] Optum, owned by UnitedHealth Group. In 2017, Optum bought [Addison, Texas-based] Surgical Care Affiliates, an ASC solutions provider and in my understanding, shaped it into a division called OptumCare Specialty Practices. That division has been planning to create a PE-like joint venture with GI practices. If they buy Gastro Health, Optum would rapidly gain market share. That in turn would take United a step closer to their integrated healthcare strategy.
Though less likely, a PE-backed health system might be interested in the deal. For example, [Dallas-based] Tenet Healthcare has significant presence in Gastro Health's markets. They are backed by PE firms like BlackRock and the Vanguard Group. If they own Gastro Health, then they get to benefit from accompanied referral business and dominate those local markets.
Other options of buyers might include companies interested in expanding their presence in GI, other multispecialty models and family funds. Even though GI is increasingly becoming digitally enabled, I don't see tech companies acquiring practices yet.
Q: What sort of ramifications would this kick off for the other platforms?
EM: Gastro Health will set the market for valuations of PE-backed GI platforms, providing a benchmark for the other platforms to measure against. There will also be runners-up on the Gastro Health process that will be logical buyers for other platforms in the sector, which could accelerate exit timelines for certain PE firms.
PS: Post-exit, Gastro Health will aim to get bigger and more sophisticated with access to fresh capital. That'll pressurize other PE platforms to advance their business plans. In the near term, the GI M&A market will heat up. While it may seem like there's no more room, newer PE platforms may also emerge because more capital will flow into the market.
Most GI practices will be compelled to decide on a growth strategy. The market will largely morph into three categories: consolidation under PE, association with health systems and non-PE-led consolidation.
Further into the future, we'll see the next set of PE in GI exits around 2023-25 led by GI Alliance and [Atlanta-based] United Digestive. The GI market would've matured by then, leading to mergers between smaller platforms. Separately, digital health ventures would become more mainstream in healthcare. That would pave the way for more technology-oriented investments and accompanied disruption for traditional PE-based models.
Overall, GI in the next five years will look nothing like the time when Audax invested in Gastro Health.
Note: Mr. Suthrum discusses several trends on GI in his book Scope Forward, available here.