Home health and hospice company Amedisys will acquire Associated Home Care for up to $38 million, including up to $10 million to be paid to Associated's CEO.
The deal, Amedisys' second this year, would pay Associated Home Care $28 million for the Boston-area private-duty home care company. Michael Trigilio, Associated Home Care's chief executive, would be eligible for up to $10.1 million in additional payments based on the company's earnings during the first five years after the deal.
The additional payment—known as an earn-out or contingent payment—is not common in deals made by healthcare service companies such as home care, hospitals, pharmacy services or imaging. Roughly 1% of 9,340 transactions conducted by health service companies included earn-out payments between 2006 and 2015, according to Thomson Reuters Corp. data. The value of contingent awards was about 2.5% of those deals' total value over that time period.
Trigilio's payout is contingent on his employment. Amedisys said he will oversee a new personal-care division after the acquisition. But that assignment is also contingent on whether Associated Home Care beats targets for earnings before taxes, interest, depreciation and amortization each of the five years that follow the deal's close.
That creates an incentive for Trigilio to stick around. It may also induce aggressive growth at a time when policymakers and the industry are moving away from growth-oriented incentives, which can encourage the overuse of healthcare services.
Amedisys said the total consideration, including Trigilio's full payout, equals approximately five times adjusted earnings before taxes, interest, depreciation and amortization. The company has 5,000 elderly clients across Massachusetts who receive care from Associated Home Care's approximately 1,500 workers, a news release said.
Amedisys' CEO was unavailable for an interview, a spokesman said. Associated Home Care did not respond to an interview request; attempts to reach Trigilio were unsuccessful.
Some earn-out terms may help boost earnings growth without creating an incentive to boost volume, said Mark Kulik, a managing director for the Braff Group, a healthcare mergers and acquisition consulting firm. Terms may seek to encourage growth through acquisitions or market-share gains, for example. Newly acquired companies may boost earnings with savings from more efficient operations as part of a larger organization.
Earnings are commonly used to price companies for sale, and can be used for contingent awards when buyers and sellers don't agree on the perceived value of the acquisition target, said Mark Francis, head of the healthcare group for investment bank Houlihan Lokey.
Earn-outs can be complicated to negotiate and are less common in healthcare because of the risk that they may violate fraud and abuse laws, but they have also fallen out of favor during the frenzy of merger and acquisition activity, said John Callahan, head of international healthcare merger and acquisitions for McDermott, Will & Emery.
Some major recent deals have included contingent payments. The $4.7 billion deal by dialysis provider DaVita for the medical group HealthCare Partners included $275 million tied to earnings performance after the deal closed to be paid to HealthCare Partners' owners. Deals made by AmSurg Corp., the ambulatory surgery management company, post-acute-care provider Kindred Healthcare and CardioNet, an outpatient cardiac monitoring company, also offered contingent payouts, according to Thomson Reuters.
Associated Home Care, based in North Andover, Mass., is described in a news release announcing the Amedisys deal as a family-owned company. Massachusetts records list Trigilio as the company's CEO, treasurer and secretary.
The deal is expected to close March 1.
