Uni­ver­sal’s big play

Psy­chi­atric So­lu­tions deal would boost rev­enue, debt

Modern Healthcare - - The Week In Healthcare - Vince Gal­loro

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.”

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