Behavioral Health Care Stocks Up Again – 8.1% in March, Driven by AAC’s AdCare Acquisition.
For the fifth straight month, the Behavioral Health Composite, which tracks the performance of the three largest behavioral health companies – American Addiction Centers (AAC), Universal Health Services (UHS), and Acadia Healthcare(ACHC) – rallied again, up 8.1% in March. This is in spite of significant losses in the broader market, with the S&P losing 1.4%.
Investors cheered AAC’s acquisition of AdCare….
ACC (↑18.6%) drove the composite, still rallying from its positive Q4 2017 earnings release in February. However, the real boost came after announcing on March 1 the completion of its acquisition of AdCare for $85 million. “This transaction brings approximately 15% additional in-network and public payor revenue and EBITDA to AAC’s portfolio, thereby de-risking it, as the company’s out-of-network revenue is reduced from 77% to 65%,” said Kevin Taggart, Managing Partner at Mertz Taggart. The transaction was also accretive. AAC was trading at approximately 11x AEBITDA as of the date of the closing while paying 10x for AdCare’s $8.5 million in AEBITDA. AAC management has also identified approximately $3.9 million in total synergies over the next 12 months, bringing its Pro-forma multiple down to an attractive 6.9x.
ACHC (↑3.5%) continued to increase from its positive Q4 2017 earnings release in February. The company reported earnings of $0.61 per share and beat analysts’ expectations by 13%. The company also saw EBITDA and earnings increase by 2.7% and 3.4% year over year, respectively.
UHS (↑2.1%) rose slightly after having a down month in February. The company also had a positive earnings surprise, reporting $2.00 EPS vs. estimates of $1.84.
For the last twelve months (LTM), the BHC lags the S&P by approximately 5%. For the past five months, however, the BHC beats the S&P by nearly 22%.
Valuation – Public Comps
Below are the Enterprise Value / EBITDA and Enterprise Value / Revenue ratios for AAC, ACHC, and UHS. The valuations provide a relative barometer for what smaller companies can expect. Given the higher relative risk of smaller companies (e.g., less liquidity, smaller revenue base), we typically (though not always) see multiples that are lower than those of the public companies.
Company 3/31/16 3/31/17 3/31/18
AAC 18.63x 13.27x 12.40x
ACHC 18.33x 12.20x 11.45x
UHS 9.57x 9.54x 8.79x
Company 3/31/16 3/31/17 3/31/18
AAC 2.97x 1.46x 1.70x
ACHC 3.93x 2.52x 2.35x
UHS 1.75x 1.66x 1.46x
March 1, 2018 – AAC Holdings, Inc. announced today the completion of the acquisition of AdCare, Inc. for $85 million. AdCare is one of the leading providers of addiction treatment in New England with ~8,000 hospital and residential admissions and over 116,000 outpatient visits per year. AdCare’s facilities include a 114-bed hospital for substance abuse treatment, including detoxification and rehabilitation services, and five outpatient centers in Massachusetts and a 59-bed residential treatment center, and two outpatient centers in Rhode Island. The acquisition also includes the purchase of 1-800-ALCOHOL™, a nationally recognized referral phone line, and other toll-free numbers that together generate ~50,000 calls per year.
March 2, 2018 – BayMark Health Services announced the acquisition of Canadian Addiction Treatment Centres (CATC), the largest opioid addiction treatment provider in Canada. The acquisition includes 72 Opioid Treatment Programs (OTPs), 19 pharmacies, and 1 residential treatment center located in Ontario. This acquisition positions BayMark as the largest provider of opioid addiction treatment in North America with 167 locations across the U.S. and Canada.
March 2, 2018 – Gateway Foundation acquired Beacon House of Pacific Grove. With two locations in Pacific Grove, Beacon House treats men and women seeking to realize a lifetime without drugs and alcohol. The nonprofit partnership expands Gateway’s national alcohol and drug treatment programs to California.
March 28, 2018 – Banyan Treatment Center recently announced it has acquired the 68-bed Clearbrook Manor in Laurel Run, Pennsylvania. Clearbrook Treatment offers services such as detox and residential services, with the acquired Clearbrook Manor including a 22-bed detoxification unit and sub-acute medical station. The deal will extend Banyan’s reach to seven locations over four states.