Closing a $426 million deal to eliminate a competitor is reason to celebrate, but a spokesman for Psychiatric Solutions told investors last week that the acquisition party for the Franklin, Tenn.-based behavioral health provider is not over just yet.
The acquisition market was one of the topics in Psychiatric Solutions presentation to investors at William Blair & Co.s 27th Annual Growth Stock Conference in Chicago last week. After completing the transaction to buy Lewisville, Texas-based Horizon Health Corp. on June 1, Psychiatric Solutions now has 90 facilities with about 10,000 beds in 31 states, and Puerto Rico and the U.S. Virgin Islands, and about 10% of the market share in the $15 billion behavioral healthcare segment, according to Brent Turner, executive vice president of finance and administration.
The only publicly traded pure player in behavioral health, Psychiatric Solutions is well-positioned to take on more in a segment Turner and others have described as fragmented. And with the facilities owned by competitor Universal Health Services in Mechanicsburg, Pa., that leaves more than 300 free-standing facilities open for acquisitions. According to Turner, there are five pockets of sizable assets that the company defines as having $150 million in revenue. People thought the party is overno more big deals, well, they thought that last year too and we bought ABS (Alternative Behavioral Services) and Horizon, he said in a webcast of his presentation. We continue to see a robust environment.
A relatively small part of the healthcare industry, behavioral healthcare is a segment that tends to result in companies growing larger to have the economic leverage to succeed, said Mark Covall, executive director of the National Association of Psychiatric Health Systems, a trade group that represents the industry. Covall also said the segment is fragmented and that he expects to see more consolidation.
To that end, Psychiatric Solutions has the infrastructure needed to continue growing at this pace without having to hire a new division leader, said Ryan Daniels, an analyst with William Blair, which provides investment banking services to the company. He noted Turners comment that Psychiatric Solutions has 11 division presidents who could each ultimately oversee 10 facilities. With only 90 facilities right now, the company already has the adequate infrastructure in place to take on 20 more facilities.
In the meantime, there are expectations for the company now that it has closed the Horizon deal, according to Darren Lehrich, an analyst with Deutsche Bank, which also provides services to Psychiatric Solutions. One will be to stabilize or sustain earnings in the contract-management segment, which has seen pressure, Lehrich said. This deal is significant because it expands Psychiatric Solutions reach into that business. But perhaps a more urgent priority is to develop the facilities the company just acquired from Horizon.
First (is) the opportunity to improve the 15 owned hospitals, Lehrich said. Horizon had a pretty rocky time with its hospital management business. They got into the acquisition game in 04 and we dont think they built up enough infrastructure to support the growth. (Psychiatric Solutions) has pretty deep infrastructure and will give those facilities the right amount of attention to grow the facilities and improve their profitability.