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Jason S. Greis, Esq. McGuireWoods LLP Friday, December 4, 2009 ALTHA Advocacy Meeting. The Art of the Deal: The Re-Emergence of Post-Acute M&A Activity. Current State of the U.S. Economy: The Good, the Bad and the Ugly. The “Good”: Consumer confidence rebounding since low in Feb. 2009

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jason s greis esq mcguirewoods llp friday december 4 2009 altha advocacy meeting
Jason S. Greis, Esq.

McGuireWoods LLP

Friday, December 4, 2009

ALTHA Advocacy Meeting

The Art of the Deal: The Re-Emergence of Post-Acute M&A Activity

current state of the u s economy the good the bad and the ugly
Current State of the U.S. Economy: The Good, the Bad and the Ugly
  • The “Good”:
    • Consumer confidence rebounding since low in Feb. 2009
    • Purchasing Managers’ Index (Mfg.) has recovered to pre-recession index figures
    • Stimulus funds may be beginning to have an impact
    • Dow and NASDAQ are respectively up 17.5 and 35.5%
    • Volatility Index has settled (albeit higher) from Oct./ Nov. 2008 high
    • Corporate and consumer deleveraging continues
    • Private equity companies getting back into the markets ($400 billion private equity investment overhang)
current state of the u s economy the good the bad and the ugly3
Current State of the U.S. Economy: The Good, the Bad and the Ugly
  • The “Bad”:
    • Availability of commercial credit still drastically limited for most borrowers
    • Lower risk tolerance by banks and private equity firms leading to larger syndications for smaller deals and more restrictive financial terms
    • Healthcare legislation creating uncertainty resulting in backlog of M&A activity
current state of the u s economy the good the bad and the ugly4
Current State of the U.S. Economy: The Good, the Bad and the Ugly
  • The “Ugly”:
    • Loss of an estimated $8 trillion in personal wealth
    • Worst may be yet to come in commercial real estate markets
    • Massive governmental debt load threatens to destabilize U.S. dollar and cause inflation
    • 10.2% unemployment rate (Oct. ’09) is highest in 26 years (healthcare the exception, has added 597,000 jobs)

The Unknown:

    • Impact of health reform legislation/regulation on providers (i.e., reimbursement compression; new provider types; removal of post-acute silos; bundling; 1-year MMSEA extension, etc…)
current state of the healthcare sector an m a perspective
Current State of the Healthcare Sector (an M&A Perspective)
  • Healthcare IPO and M&A activity has increased over the past 4 months:
    • Cumberland Pharmaceuticals (8/10/09) (IPO)
    • Emdeon (8/11/09) (IPO)
    • Select Medical Holdings (9/24/09) (IPO)
    • Talecris Biotherapeutics (9/30/09) (IPO)
    • Omeros (10/7/09) (IPO)
    • AGA Medical Holdings (10/20/09) (IPO)
    • Omega Healthcare Investors (NYSE: OHI) announces agreement with CapitalSource to purchase 80 LTC facilities (11/17/09) (SPA)
    • RehabCare completes merger with Triumph HealthCare (11/24/09) (merger)
current state of the ltach industry an m a perspective
Current State of the LTACH Industry (an M&A Perspective)
  • Top 10 companies own approximately 73% of LTACHs;
  • 5 publicly-traded companies operate approximately 53% of LTACHs;
  • Publicly-traded companies with substantial cash reserves may explore small “one-off” strategic acquisitions in next 18 months to round out geographic gaps;
  • Increased deal activity anticipated after passage(?) of potential health care reform bill;
  • More than 60 LTACHs (15%) may change ownership or enter into strategic alliances by end of 2010!
perfect storm of industry specific and macroeconomic events resulting in increased m a activity
“Perfect Storm” of Industry-Specific and Macroeconomic Events Resulting in Increased M&A Activity
  • MMSEA development and bed expansion moratorium;
  • Regulatory uncertainty causing some operators to re-think LTACH focus;
  • Credit crisis, slow-pay Medicaid agencies and increased bad debt causing escalation in average debt burden and distressed sale activity;
  • Increasing disparity in hospital and system payor mix;
  • Overbedding in certain geographic markets, underutilization in others.
perfect storm of industry specific and macroeconomic events resulting in increased m a activity8
“Perfect Storm” of Industry-Specific and Macroeconomic Events Resulting in Increased M&A Activity
  • Increasing inequality in resources due to I.P.O. and private equity investment and system-wide economies of scale;
  • EBITDA multiples remaining low for distressed sales—caveat emptor (generally 4.5 to 5x), with certain notable exceptions;
  • Improving operator sales multiples (6 to 6.5x)
  • Private equity companies presently investing in the LTACH sector reaching investment horizon:
    • Carlyle Group
    • Cressey & Co.
    • Ferrer Freeman & Co.
    • Highland Capital Management
    • TA Associates
    • Waud Capital Partners
    • Welsh Carson
key provider level issues leading to increased m a activity
Key Provider-Level Issues Leading to Increased M&A Activity
  • R.A.C. and Wisconsin Physician Services/AdvanceMed-type audits;
  • Increased capital expenditure needs for development and expansion of high observation/intensive care units;
  • Continued need for more intensive provider outreach and education;
  • Physician contracting issues (vertical incentive alignment);
  • Electronic health record adoption;
  • Revised MS-LTC-DRG relative weights for FY 2010;
  • Ever-increasing insurance costs, despite soft insurance market;
  • Delays in Medicaid reimbursement.
the future of ltachs gazing into the crystal ball
The Future of LTACHs: Gazing into the Crystal Ball
  • LTACHs will continue to be an essential part of the continuum of care.
  • The only true constant is change!
    • Medicare payment rate adjustments;
    • Post-acute care bundling pilot or demonstration project;
    • Mandatory quality reporting;
    • Competition from SNFs, IRFs and continuing care hospitals(?), until facility and patient criteria developed;
    • Loss of executive compensation rebuttable presumption;
    • Restrictions on physician hospital ownership and JVs;
    • Increasing transparency in relationship with physicians.
the future of ltachs gazing into the crystal ball11
The Future of LTACHs: Gazing into the Crystal Ball
  • Entry into market of new operators funded by smaller private equity funds and key LTACH leaders exiting from consolidation of other providers
  • Significant M&A activity of “usual suspects” in LTACH sector unlikely over next 18 months
  • Strategic sales and consolidation of operators with between 10 and 25 facilities
  • “Cherry picking” of facilities based upon location for operators with smaller number of facilities (i.e., competition, ownership structure, and CON vs. non-CON state)
  • Generally leading to a market dominated by a small number of well capitalized companies able to roll with the changes.
about mcguirewoods llp
About McGuireWoods LLP
  • 18 domestic and international offices, 8 with health care practices;
  • Ranked 6th largest health care practice in 2009;
  • Established health care practice with breadth and depth of experience representing providers, including post-acute care and senior care operators and management companies;
  • Trusted transactional, regulatory, payor appeal and litigation counsel;
  • Cost-effective legal solutions.

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questions
QUESTIONS

Jason S. Greis, Esq.

McGuireWoods LLP

77 W. Wacker Drive, Suite 4100

Chicago, Illinois 60601

Phone: 312.849.8217

jgreis@mcguirewoods.com

www.GreisGuidetoLTACHs.com