With health care reform creating more covered beneficiaries (many of whom do not have a primary care physician), a shortage of physicians and advance practice providers, and an emerging financial incentive to keep patients out of the ER, urgent care is on its way to becoming the fastest growing sector in health care service M&A posting 50 plus deals in 2014 and 2015. And with more than 30 private equity sponsors with platforms on the prowl, we anticipate a long run of heightened activity as the rush continues to capture street corners and scale.
After a 125% increase in deal flow from 2013 to 2014, transaction volume dipped modestly in 2015, down 4%. The good news here is that these results prove that 2014 wasn’t a fluke. The less good news is that 2015 did not build on 2014’s gains, as we would have otherwise anticipated. Based on what we have seen in other sectors that have produced such rapid M&A growth, we speculate that after such a run-up in volume, the pool of market-ready acquisition candidates has somewhat drained. This is especially true in a relatively “immature” sector that has produced so many start-ups over the past 2-3 years.
Although less than what we saw in 2014, PE continues to a significant force in urgent care M&A, accounting for 45% of total deal flow. That said, the five new market-entry platform deals posted are actually higher than we would otherwise have anticipated. After a five year run between 2010 and 2014 that produced 30 such investments, the inventory of attractive platform acquisition candidates was so diminished, that sponsors eager to get into urgent care went the start-up route instead. So despite a fall-off last year, the five deals are quite noteworthy – and indicative sustained interest in the space.
Although the median number of units acquired in each urgent care transaction has bounced around a bit, it’s been 3.0 or below for four of the past six years. And if you consider that at the median, there are an equal number of transactions above this level, as below, that means that there are a whole lot of deals with being completed with one or two units. This suggests that contrary to conventional wisdom, you don’t have to grow to five to 10 centers before you can attract attention from buyers.
The number of unduplicated buyers of urgent care centers continues to rise, crossing the 40 mark (42) in 2015. This portends well for an extended run of M&A activity, as more players enter the game, looking to develop critical mass in the markets they serve. This variable is even more telling when you marry up both the number of deals and buyers – see Urgent Care Deals per Unduplicated Buyer below.
In order to understand this ratio. Consider two scenarios: In M&A market 1, there were 20 deals completed by 2 buyers yielding a ratio of deals per unduplicated buyer of 10.0 (20/2). In M&A market 2, there were also 20 deals completed, but in this scenario, they were completed by 10 buyers, producing a ratio of 2.0 (20/10). With substantially more buyers in the market, M&A market 2 is a far more competitive and robust than market 1. So for this data point, the closer the deals per unduplicated buyer is to 1.00 (a “perfect” ratio), the better. In urgent care, then, we can see that the trend is extremely favorable, closing out 2015 at just over 1.20 deals per buyer