UnitedHealth doesn't need another megasized deal to win

(Bloomberg Gadfly) —A body in motion stays in motion, and the push for lower health costs certainly isn't losing any momentum.

UnitedHealth Group Inc. agreed on Monday to acquire outpatient-services provider Surgical Care Affiliates Inc. for about $3.2 billion including net debt. It's the latest in a string of healthcare services deals, including AmSurg Corp.'s merger with Envision Healthcare Holdings Inc. and Blackstone Group's planned buyout of physician outsourcing company Team Health Holdings Inc. And like those deals, the Surgical Care takeover is a bet that amid all the uncertainty surrounding the health-care industry right now —from Republicans' vow to repeal the Affordable Care Act to potential Medicaid and Medicare changes -- one thing will remain paramount: the need to keep expenses down.

Tepid response
Outpatient surgery centers have gained in popularity because procedure costs can come in as much as 40% below what traditional hospitals charge, says Bloomberg Intelligence analyst Jason McGorman. Surgical Care operates about 200 of them, along with seven surgical hospitals and a sleep center. With Medicare reimbursement for this sector set to grow this year at the fastest pace since 2012, ambulatory surgery centers are a bright spot of revenue and Ebitda growth.

In a presentation given after the November elections, UnitedHealth said demand for outpatient care may increase as much as 9% over the coming year. That push for a lower-cost alternative should continue even if health-care facilities generally lose business under a repeal of Obamacare. The urgent and primary-care centers that UnitedHealth's OptumCare unit focuses on could be more at risk from a rollback because they've benefited from a surge in newly insured patients stepping up doctor visits. In that respect, buying Surgery Care is smart.

It's also just the latest example of UnitedHealth's efforts to diversify (the company's Optum unit also provides pharmacy-benefit management services and technology), while its large health-insurance peers try to gobble up each other. The fates of Aetna Inc.'s $37 billion purchase of Humana Inc. and Anthem Inc.'s $50 billion-plus takeover of Cigna Corp. are in the courts' hands after U.S. regulators said the deals would undermine competition. There's still a (small) chance either or both deals actually gets done, but in retrospect, perhaps those insurers' time and deal dollars would have been better spent on buying growth in other higher-margin areas of health care.

Built for growth
UnitedHealth is offering $57 a share for Surgical Care and proposing to pay for as much as 80 percent of the takeover in its own stock. It's not overtly cheap; the takeover bid values Surgical Care at about 15 times its projected 2017 Ebitda, compared with the multiple of about 9 times that was implied for Envision in its nil-premium merger with AmSurg at the time it was announced. Blackstone is paying about 11 times Team Health's estimated 2017 Ebitda. But you don't usually find growth investments in the bargain bin.

If anything, this deal may hearten Blackstone as it awaits closure of the $6.1 billion purchase of Team Health announced in October. Rival buyout firm TPG acquired Surgical Care Affiliates from HealthSouth Corp. in 2007 for $950 million. After taking Surgical Care public at $24 a share in 2013, the private equity firm sold stock in the company twice in 2015 while it was trading at around $35 and $38, respectively. The takeout price of $57 tops Surgical Care's previous high in the years since its IPO. Not too shabby.

Surgical Care's business is different from that of Team Health, but demand for health-care services deals is alive and well. AmSurg previously expressed an interest in Team Health with the idea of gaining scale and catering to initiatives to reap cost savings by bundling all of a patient's hospitalization charges on one bill. After it digests the Envision merger, it's a logical suitor for Team Health as well. There's more M&A to come from this industry.

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