An active second quarter and a series of indicators that portend more deals to come have 2021 on track to be a record-setting year for merger and acquisition activity in the behavioral healthcare space. In the second quarter, 26 deals were announced, bringing the total to 57 for the year at its midpoint. That puts 2021 on pace to top the previous high watermark of 107 set in 2020.
“We expect transaction volume will likely accelerate over the second half of the year as sellers, burned out from the pandemic, are looking to get something closed in 2021 due to the anticipated increase in the capital gains tax rate,” said Mertz Taggart Managing Partner Kevin Taggart.
Note: Total industry transactions does not necessarily equal the sum of the sub-industries, as many transactions include more than one sub-industry.
The Biden-Harris administration has introduced a new tax bill that will have significant implications on transactions. The bill proposes moving the tax rate on long-term capital gains from 23.8% (including the 3.8% Medicare tax) to 43.4%, and if passed, would be expected to go into effect on Jan. 1, 2022. Under the current 23.8% rate structure, a $10 million transaction would result in $7.62 million of after-tax proceeds. To net the same $7.62 million after taxes under the new proposed rate, a deal would require $13.46M million in cash proceeds.
In the meantime, private equity groups have remained active in behavioral healthcare, accounting for 20 of the second quarter’s 26 transactions, including 18 completed by private equity-backed strategic firms. This includes four transactions by Chicago Pacific Founders’ Recovery Ways and two by Brightview, which is backed by Shore Capital.
Deals involving addiction treatment and mental health provider organizations remained in line with activity in the first quarter of 2021. Mergers and acquisitions involving autism services and intellectual/development disabilities service providers, however, dipped from 11 deals completed in the first quarter of the year to just six in Q2.
“Many private equity groups that have a platform company have decided to go the de novo route rather than to acquire a small provider for what have been high multiples,” Taggart said. “They can do it more cost effectively and have a waiting list shortly after they open.”
Looking ahead to the remainder of 2021, Taggart said availability of M&A advisors—from attorneys and accountants to those in the clinical realm—could pose the biggest roadblock to deals getting done before the end of the year.
“Many won’t have the bandwidth to handle the volume for those that aren’t already progressing down the path,” Taggart said. “We’ve talked to a number of accounting firms, buyers and legal firms that are concerned they won’t be able to handle the demand for those that aren’t already engaged in the process.”
Demand for addiction treatment services continues to surge, as the latest CDC data shows more than 92,000 Americans died by overdose in the 12 months ending in November 2020, a record for a 12-month period and a 30% increase over a year prior.
M&A activity in the addiction treatment sector saw a slight uptick in the second quarter, with 14 deals announced, up from 12 in Q1.
Avenues Recovery expanded its national network of substance use disorder treatment centers with its acquisition of Valley Forge Medical Center and Hospital in Montgomery County, Pennsylvania.
BayMark Health Services was active once again, announcing deals for two operators of residential and office-based opioid treatment companies: Hope for Tomorrow in West Virginia and New Day Recovery in Louisiana.
The aforementioned deals for Brightview were for Aspire in Chesapeake, Virginia, and Life Spring Recovery in Columbus, Ohio.
Virtual peer support services provider MAP Health Management acquired CARMAhealth, which offers primary care and behavioral health management services.
Indiana-based Meridian Health Services expanded its addiction treatment services in the state by entering into a partnership with Home with Hope in Lafayette, a deal that included the addition of a maternal treatment program.
CPF Recovery Ways announced four deals in the second quarter. The company added addiction treatment providers Alpine Recovery Services and Colonial Clinic, as well as Omega Recovery and Breakthrough Recovery Group, which provide both addiction treatment and mental health services.
Jacksonville Beach, Florida-based Refresh Mental Health added Carolina Behavioral Care’s network of programs in central North Carolina to its portfolio.
Vertava Health (formerly known as Addiction Campuses of America) expanded its presence in the Mid-South region of the U.S., as well as its MAT, IOP and primary care offerings in outpatient settings, with a deal for Memphis-based IAC Associates.
Autism Services & Intellectual/Developmental Disabilities
The volume of deals for autism and I/DD services, which has ebbed and flowed on a quarterly basis since mid-2019, once again dipped in the second quarter of 2021. Just six deals in this space were completed in the quarter, down from 11 in Q1 of 2021.
Among the deals in the autism and I/DD space announced:
Acorn Health Associates expanded its presence in Tennessee by acquiring substantially all of the assets of LEAP Behavior Analysis.
In May, Caravel Autism Health added the Center for Autism Treatment, building upon Caravel’s network of six autism therapy centers in the Milwaukee metro area.
The Center for Social Dynamics expanded its footprint into Washington and Idaho by partnering with JF Autism Services, which provides ABA services in home-based settings.
KNR Therapy, backed by Shields Capital, merged with Forbes Behavioral Services, combining two Florida-based providers of ABA therapy.
Deals for mental health service providers remained roughly in line with the first quarter of 2021, with 10 deals completed in Q2 compared to 11 in Q1. Demand for services in the sector is expected to remain high in the coming months as the nation starts to enter a post-pandemic phase.
Transactions involving mental healthcare organizations in the second quarter included:
Community Psychiatry more than doubled its facility count and began a national expansion outside of its headquarters state of California with a deal for North Carolina-based MindPath Care Centers, bringing Community Psychiatry’s total number of facilities over 70.
Oaks Integrated Care announced a merger with a fellow not-for-profit provider in New Jersey, Cope Center in Montclair.
In June, LifeStance Health Group, a Scottsdale, Arizona-based outpatient provider, announced an IPO of 40 million shares at a public offering of $18 per share.
The Mentor Network expanded into North Texas with a deal for Sage Care Therapy Services, with new service offerings including home-based pediatric therapies for children.
Vizion Health purchased Brookhaven NeuroNetwork, which includes the operations of Brookhaven Hospital, a behavioral health facility located in Tulsa, Oklahoma.