2009 HME Deal Total Up, but Market Challenges Discourage Buyers

PITTSBURGH — HME merger and acquisition transactions saw
an upswing last year after a discouraging
2008, but there’s no doubt the sector’s challenges are still
scaring off buyers, according to a report issued by The Braff
Group.

“Both 2007 and 2009 totals for HME were about 50 transactions;
2008 was less than 40,” said Bob Leonard, managing director, home
health, hospice, staffing and home medical equipment. “While the
increase in activity appears encouraging, the market fundamentals
are not.”

Leonard said buyers tended to be regional or national providers
and, despite the favorable demographics for home medical equipment,
there were few new entrants.

“Private equity firms, while attracted by the demographics, have
been scared off by the reimbursement risks,” Leonard said, singling
out competitive bidding and the 36-month rental cap on oxygen.
“While one new major strategic buyer emerged — Teijin, a
large industrial and medical company in Japan — another, Air
Products, exited.”

Braff’s annual report on M&A activity for the HME sector
said it could not ascribe the bit of growth to a change in market
sentiment.

“Rather, our sense is that the increased deal volume is
attributable to an increase in the supply of acquisition candidates
as prospective sellers who have delayed going to market in the hope
for more favorable resolutions to competitive bidding and the
oxygen cap have reluctantly decided to exit.”

The HME deals that are closing “are opportunistic, i.e., priced
to protect the buyer from further price erosion,” Leonard noted.
“While many owners find it worth more to keep [their businesses
rather] than sell at reduced value, some are prepared to accept a
lower value in order to move on for varied personal reasons.”

He said the monetary values of the deals are “clearly down, in
many cases one-quarter to one-half of prevailing values back in the
peak years (2002-05).”

Leonard said the sector could suffer a further drop-off in deals
in the Round 1 competitive bidding MSAs, “possibly to be followed
by selective buying of winning bidders in the future.”

Although the report for the first quarter of 2010 won’t be
available for some time, Leonard said, “We would not expect to see
an uptick yet.”