Universal’s big play
Psychiatric Solutions deal would boost revenue, debt
True to form, even as Universal Health Services embarks on the biggest deal in the company’s history, it’s working with a safety net. The combination of Psychiatric Solutions and the behavioral-health business of UHS, King of Prussia, Pa., would produce by far the largest behavioral-health provider in the country (See chart). In 2009, UHS’ behavioral business had revenue of $1.32 billion, while Franklin, Tenn.-based Psychiatric Solutions had revenue of $1.81 billion for 2009, according to securities filings. The $3.1 billion proposed acquisition— including $2 billion in cash to purchase the outstanding shares of Psychiatric Solutions and assumption of $1.1 billion in debt—also transforms UHS, boosting its total revenue by more than a third, based on the figures the companies reported in 2009.
From 2005 to 2007, most of UHS’ investor-owned hospital peers took on significant debt. Health Manage- ment Associates took on its debt to provide a special dividend to shareholders with a leveraged recapitalization. HCA sought shelter from the scrutiny of public equity markets with its leveraged buyout—and provided cash returns to shareholders, too. Two companies made significant acquisitions, as Community Health Systems bought Triad Hospitals and LifePoint Hospitals bought Province Healthcare Co.
UHS, however, resisted calls to boost its leverage or to spin off its psychiatric business to shareholders. Instead, the company waited for this opportunity, a deal that Alan Miller, UHS’ chairman and CEO, called “a truly compelling transaction.” The company is going to take on a lot more debt— $4.15 billion, giving it a ratio of debt to earnings before interest, taxes, depreciation and amortization of nearly four by the time the deal closes. But, analysts said, the acquisition of Psychiatric Solutions will generate cash from operations and cost-sav- ing synergies to pay down that debt, even before UHS takes a crack at bringing the profit margins on the acquired facilities up to its own.
Psychiatric Solutions generated nearly $56 million in cash from operations in the first quarter, according to its earnings release. UHS also estimates that it will save $35 million to $45 million annually by eliminating corporate overhead within the first two years. About 40% of those savings will come from eliminating the salaries and equity compensation that Psychiatric Solutions was paying its senior management, who will not stay on after the acquisition.
If there is a parallel for this deal, it is Community’s acquisition of Triad in 2007. Both Triad and Psychiatric Solutions were targets of private equity firms initially, but that interest opened a bidding process won by strategic acquirers. In both cases, the acquiring company’s management believed that it could expand margins by applying its management strategies. In both cases, the acquiring company had been more methodical about its acquisitions until a great opportunity came its way.
Community and Triad probably had more philosophical differences than UHS and Psychiatric Solutions, said Tom Gallucci, senior healthcare services analyst and a managing director of Lazard Capital Markets. Both Community and Triad boasted great physician relationships, but Triad was much more aggressive in spending capital on its physician
Gallucci: “It’s a sign that they’re much more confident.”