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."