BIRMINGAM, Ala. (June 2, 2020)—The coronavirus crisis has not had a huge impact on M&A activity, said Mertz-Taggart, a health care services M&A firm in their quarterly update. Rather, Q2 transactions have been predictably impacted by the Patient Driven Groupings Model.

Home-based care—including Medicare-certified home health, hospice and non-medical home care—had only nine transactions quarter-to-date, compared to 25 deals in Q2 2019 and 27 deals in Q1 2020. That represents a fall-off of about 30% to 35%.

“We may have had a few deals get pushed back or killed due to COVID-19, but most of this dip is a predictable result of PDGM,” Mertz Taggart’s Cory Mertz said. “Buyers want to wait until the dust has settled on PDGM and see how potential targets perform under the new model, which requires at least a few months of financial and patient data.” 

Mertz believes the company will start to see more home health companies come to market in the second half of 2020. The fall-out from PDGM hasn’t been as bad as many had predicted, with many home health agencies performing better under the new system.

Meanwhile, hospice M&A remains hot, according to the report. Q1 2020 saw more transactions in the space than ever before, continuing a two-year upswing (nearly 35). This represents a strategy many buyers have adopted amid pausing home health transactions.

And while hospice has had to endure some business challenges amid the coronavirus, those have been less disruptive than those in home health.

Buyer Motivations During COVID-19
While buyers are still pursing M&A, many are occupied with COVID-19, which means mergers and acquisitions are taking a back seat, according to the report.

Private equity companies are also re-deploying a portion of their dry powder to keep holdings in harder hit industries afloat. Plus, travel for due diligence is difficult right now, and banks—which typically provide new funding for deals—are exercising caution, as they’re writing off significant amounts of debt for bleeding industries.  

“Banks’ focus right now is on salvaging what they can from those investments, so their ability to lend will change, as will their standards,” Mertz said. “They will mostly likely not be able to be as aggressive as they were in 2019, but for essential health care companies we believe the lenders will come back in Q3 or Q4 of 2020.”

Looking Ahead
In the short term, deal activity will likely rise steadily in home-based care especially in hospice,. But throughout 2020, many of those deals will be smaller transactions with EBITDA below $5 million.

Valuations will likely remain flat for larger deals and down modestly for smaller companies.

“Valuations almost definitely will not be going up, but for well-run companies we don’t expect them to go down much, if at all, either,” said Mertz Taggart Managing Partner Kevin Taggart. “For individual companies that are considering a sale, valuations will depend on where you are in your COVID-19 recovery. Those companies that haven’t yet fully recovered, but expect to, may still be able to command ‘as-if’ pricing, but the buyer will likely want the seller to take on some of that recovery risk in the form of an earnout or other structure.”  

Ultimately, well-run home-based care companies have an optimistic future ahead on the other side of COVID-19, said the report.

“All said, we expect we’ll continue to inch back toward normalcy,” Mertz said. “We expect deal volume to get back to near-normal levels by mid-2021. It seems like a long time, but companies that are recovering and going to market today likely won’t close until Q4 2020 or Q1 2021.”

Read the full report here.