For the last five plus years, the investment community has been all over workers’ comp services. Lately, not so much.
What’s going on?
From PMSI’s purchase by HIG to APAX’ acquisition of Align and One Call to form One Call Care Management, from Onex’ buyout of York Risk Services to United Healthcare’s purchase of Helios, there have been more than a score of meaningful transactions. And that’s not counting the “tuck-in” deals such as MSC’s purchase of TMS, or One Call’s acquisition of MedFocus or EXAM’s dozens of deals to acquire small IME firms.
Of late, the transaction flow has slowed to a trickle, and the reasons for that change are well worth considering.
Before we jump into that, let’s review why work comp was so intriguing to investors. I’ll summarize:
- highly manual industry crying out for automation and process improvement
- low regulatory risk compared to national health care deals
- lots of smaller companies competing in different markets
- relatively low prices, at least at the outset
- horizontally- and vertically-fragmented service market (single region or state and/or single service e.g. DME)
Here’s what’s changed.
- Far fewer companies to buy. The PBM market alone has consolidated from 12+ down to 6 with meaningful market share. EXAM has bought up many of the mom and pop IME firms. Genex has bought case management and related businesses.
- Buyers are scarcer. After increasing interest in the private equity “industry” early on which I attribute to firms jumping on the bandwagon, PE firms have moved on to focus on other niches.
- Some of the deals have yet to meet expectations. This should NOT be surprising, as investments always carry an element of risk. However, the sometimes-high-profile “misses” have made potential buyers a bit more cautious.
- Prices are high. Multiples (buyers typically base their purchase price on a multiple of Earnings before Interest, Taxes, Depreciation and Amortization) were as high as 14x, well above historical levels that tended to be in the high single digits.
- Buyers are smarter. After learning all about workers’ comp while looking at different opportunities, buyers no longer accept at face value marketing pitches based on growth, consolidation, and “white space”.
Also, the state-specific nature of workers’ comp adds a level of complexity that PE firms often find problematic.
- Structural factors. Workers’ comp is a declining industry, with claim frequency dropping by 2-4 points per year. That trend is structural, is not going to change, and, at the risk of stating the blindingly obvious, is not emblematic of a growth industry. Therefore, buyers can’t just base part of their investment thesis on underlying structural growth, a fundamental “given” in almost every other sector – telecom, mobile communications, pharma, medical devices, energy.
That doesn’t – by any means – imply that there isn’t still significant interest in the workers’ comp services space. I am aware of four separate transactions that are in various stages, two of which have significant implications.
In addition, the debt markets, especially those firms that buy existing debt, remain pretty heavily engaged. I’d expect this to continue.
Rather it implies that investors’ interest has “matured”, they have become more selective and more discriminating.
This is good.
What does this mean for you?
Smarter buyers will lead to better service providers.