Healthcare has been a relatively safe haven for dealmakers throughout COVID-19 uncertainty, particularly attracting private equity investors. As economies have reopened, M&A in the sector has burgeoned as the NHS deals with post-pandemic waiting lists, the use of technology and data analytics is increased, and opportunities for business-to-consumer healthcare rise
Despite widespread financial uncertainty and extreme pressure on healthcare delivery around the world during the pandemic, dealmaking in the sector has proved remarkably resilient.
According to Refinitiv, global deal volumes in the healthcare sector totalled a record 4,621 transactions in 2020, up from 4,063 deals in 2019. And in the first six months of this year, there have been 2,347 transactions, meaning the sector is on course to deliver the same volume of deals.
There were 361 deals with any UK involvement last year – up from 344 deals in 2019. More significantly, there were $53.9bn of deals with UK involvement last year – a record year, with the country accounting for 16% of the $330.7bn of healthcare M&A deals completed globally.
In the UK, healthcare deal value for the first half of this year was $36bn, which is on track to exceed last year’s record total. And globally, there has been $247.1bn of healthcare M&A, which is three quarters of the 2020 total already.
Steady deal activity levels through the course of a disruptive 2020 and over the first six months of 2021 reflect the earnings stability of healthcare businesses, with the long-term growth trends of an ageing population and rising demand for medical services supporting investment cases and valuations. According to PwC’s Deal Insights reports, mean EV/EBITDA multiples for healthcare services companies have reached 16.1x this year.
These characteristics have proved to be especially attractive for private equity investors, who have had to maintain capital deployment timetables in spite of the uncertainty of the past 18 months. They have clustered around high-quality, resilient assets.
“Healthcare is an attractive asset class for investors, with a growing and ageing population driving the need for increased medical and social care,” says Tim Whittard, partner at WestBridge Capital, which recently sold AJM Healthcare, a supplier to the NHS of wheelchair and mobility solutions, in a secondary buy-out to Livingbridge (see box).
Building momentum
David Jones, a partner and private sector healthcare lead at Deloitte, expects to see sustained deal momentum in the healthcare space, as investors and businesses pivot their assets and portfolios to adapt to the shifting needs of healthcare systems and patients post-pandemic. Elective procedures, put on hold through the crisis, is one area where investment in increased capacity is required, and Jones sees opportunities for M&A opening up.
“As has been widely reported, COVID-19 has created a massive backlog of elective procedures in the UK, and there has been significant activity and investment in businesses that are positioned to support the NHS as it clears that backlog,” says Jones.
In July, asset manager Toscafund sold its controlling stake, for a reported £900m, in Circle Health Group, the largest operator of private hospitals in the UK, to US hospital group Centene, which is anticipating a rise in demand for private healthcare as the NHS now focuses on reducing its waiting lists.
Meanwhile, Australian private hospital group Ramsay Health Care made a £1.4bn bid for UK-listed Spire Healthcare in a deal that would have created the largest private hospital group in the UK.
Although Spire’s board recommended the deal, there was insufficient shareholder support, possibly because some held out for a higher price. Nevertheless, the rationale for the transaction – that demand for paid-for healthcare provision will grow due to NHS patient backlogs following COVID-19 – remains, illustrating how M&A will play a role in reshaping healthcare as it adapts to new demands and patient needs.
New times
WestBridge’s Whittard adds that in the UK, the NHS is going through a process of prioritising its main objectives and seeking support from the private sector for other services.
“With tightening budgetary constraints and a growing need for healthcare services generally, the NHS has become increasingly focused on in-house provision of its core capabilities of delivering acute and critical care,” says Whittard. “This has opened up opportunities for third-party suppliers in the private sector to provide the other fundamental operational, equipment and service functions.”
Jones also sees a major overhaul in occupational and business-to-consumer (B2C) healthcare, too, with M&A playing a role in bringing in or developing these capabilities: “There has been a major rebalancing around how employers support their employees, especially in areas such as mental health. Individuals, meanwhile, are taking steps to gain more control of their health, which has supported growth in B2C healthcare, especially in areas like private GP services, diagnostics, monitoring and testing.”
Ongoing activity is also anticipated in stable, long-term sub-sectors that continued to deliver steady cash flows throughout the pandemic, such as learning disabilities and long-term specialised care.
Private equity firm Waterland, for example, paid £1bn to acquire mental healthcare chain the Priory Group from US owner Acadia Healthcare, and private markets investment manager Ares Management acquired Exemplar Health Care, which operates a network of care homes specialising in complex physical and mental healthcare, from buy-out firm Agilitas.
Big data
Outside of healthcare verticals, life sciences M&A has also proved resilient, explains Amar Shah, a director and life sciences lead at Deloitte. Private equity firms have been especially active and have targeted businesses providing core services in the pharmaceutical supply chain.
“M&A activity has clustered around pharmaceuticals service providers selling into the big pharma companies. Contract research organisations and any businesses with analytics capabilities have evidenced steady, growing cash flows and have traded at high multiples.”
Companies that provide specialised life sciences software or digitally enabled services have been particularly in demand, with M&A buyers recognising the power of technology to reduce overheads and streamline workflows. US life sciences technology provider Insightful Science, for example, acquired UK drug discovery and development data management company Dotmatics, in a deal said to be worth $690m.
Throughout the pandemic, there has been a growing recognition of the power of technology and data analytics to deliver healthcare services and reduce costs and bottlenecks in healthcare provision.
This has seen series of deals involving so-called healthtech assets. According to consultancy Bain & Company, healthcare IT deals have accounted for close to a quarter (23%) of disclosed healthcare buy-out value – with investors focusing on healthcare technology to support the provision of healthcare services and management across multiple sites, beyond hospital and care home settings, as well as reducing costs and harnessing data to improve patient outcomes.
The combination of abundant equity and debt liquidity, and the healthcare sector’s blend of stability and growth, position the industry well for M&A activity through the rest of 2021 and into next year.
Deal processes are competitive and multiples high, but the long-term drivers supporting growth, and the need to revive and reshape healthcare provision following the COVID-19 pandemic, are expected to see the sector continue to attract sustained interest from private equity and strategic investors alike.