Valuation Multiples and Methodologies
- When purchasing a controlling interest in a physician hospital, 54 percent of the respondents reported prevailing valuation multiples of 5.0 to 6.9 times EBITDA, while 18 percent reported higher valuation multiples, and 28 percent reported lower multiples. 40 percent of respondents perceive that valuation multiples have stayed consistent with the prior year, while 55 percent perceive that multiples have decreased. Only 5 percent believe multiples are increasing.
- When buying out retiring or departing physicians, half of the respondents pay between 3.0 to 4.9 times EBITDA, but a quarter of the respondents pay a multiple of 5.0 times or higher.
- When buying out retiring or departing physicians, 52 percent of respondents base the redemption price on a predetermined formula. For new physician investors, 28 percent of respondents report using a formula to establish the buyin price; 24 percent allow the board to determine the purchase price; and 41 percent obtain an independent, fair market value opinion.
- Regarding the measure of profitability utilized by the respondents, 88 percent measure earnings based on earnings before interest, taxes, depreciation and amortization (EBITDA). In valuing potential acquisitions, 57 percent look at trailing 12 months of financial data, and 19 percent rely on the most recently completed fiscal year.
- With respect to political proposals related to banning or limiting self-referral to physician-owned hospitals, 72 percent report that this has no impact on the valuation process; however, 81 percent of respondents report that President Obama and the Democratic majority in Congress have a negative effect on the outlook for physician hospitals, including 26 percent who indicated that the effect is very negative.
Transaction Activity
- 39 percent of the respondents reported that acquisition activity in the physician hospital market is declining, while half indicated that there has been no change in activity from the prior year. 32 percent of respondents reported that competition for physician hospital investment opportunities has declined, while 18 percent reported that competition has increased. Half reported no change.
- During 2008, 63 percent of respondents reported performing due diligence for physician hospital acquisitions, but only 21 percent of respondents actually completed one or more acquisitions. When bidding on acquisition targets, half of the respondents report 2 to 3 bidders, and 30 percent report 4 or more bidders.
- For 2009, 42 percent of respondents plan to purchase between 1 to 3 physician hospitals. Of these, 10 respondents report plans to close only 1 transaction, and 5 respondents plan to purchase between 2 and 3 hospitals. 65 percent of respondents stated that they were opportunistic with respect to selecting physician hospital opportunities.
- More than two-thirds of the respondents fund their acquisitions principally through debt, while 18 percent fund principally with cash. 71 percent of respondents will consider a purchase opportunity regardless of the magnitude of the investment, while 21 percent of respondents will not consider an investment over $50 million.
De Novo (Start-up) versus Purchase
- One-third of the respondents report that they seek de novo opportunities; 23 percent seek turnaround opportunities; and 43 percent seek established cash-flowing centers.
- For a start-up hospital, 54 percent of respondents reported “buyin” prices of less than $75,000 per 1 percent interest. Respondents were fairly evenly spread on the ownership interest they seek to purchase; however, 42 percent of respondents indicated that a 50-75 percent ownership interest was most desirable.
Preferred Physician Specialties
- The respondents indicated the following strongly desired specialties for physician-investors: orthopedics, spine, general surgery, ENT, and gastroenterology. Cosmetic surgery and oncology were identified as undesirable specialties in a physician-owned hospital.
Management Fees
- The majority of respondents reported management fees ranging from 5-6 percent of net revenue, with 50 percent listing 5 percent as the minimum fee and half of the respondents listing 6 percent as the maximum fee. 73 percent of respondents indicate that they have an equity position in the hospitals they manage, but 68 percent of the respondents indicate that equity ownership has no influence on the level of the management fee charged.
To read the complete PHA/HCA 2009 Physician Hospital Valuation Survey, click here.
- When purchasing a controlling interest in a physician hospital, 54 percent of the respondents reported prevailing valuation multiples of 5.0 to 6.9 times EBITDA, while 18 percent reported higher valuation multiples, and 28 percent reported lower multiples. 40 percent of respondents perceive that valuation multiples have stayed consistent with the prior year, while 55 percent perceive that multiples have decreased. Only 5 percent believe multiples are increasing.
- When buying out retiring or departing physicians, half of the respondents pay between 3.0 to 4.9 times EBITDA, but a quarter of the respondents pay a multiple of 5.0 times or higher.
- When buying out retiring or departing physicians, 52 percent of respondents base the redemption price on a predetermined formula. For new physician investors, 28 percent of respondents report using a formula to establish the buyin price; 24 percent allow the board to determine the purchase price; and 41 percent obtain an independent, fair market value opinion.
- Regarding the measure of profitability utilized by the respondents, 88 percent measure earnings based on earnings before interest, taxes, depreciation and amortization (EBITDA). In valuing potential acquisitions, 57 percent look at trailing 12 months of financial data, and 19 percent rely on the most recently completed fiscal year.
- With respect to political proposals related to banning or limiting self-referral to physician-owned hospitals, 72 percent report that this has no impact on the valuation process; however, 81 percent of respondents report that President Obama and the Democratic majority in Congress have a negative effect on the outlook for physician hospitals, including 26 percent who indicated that the effect is very negative.
Transaction Activity
- 39 percent of the respondents reported that acquisition activity in the physician hospital market is declining, while half indicated that there has been no change in activity from the prior year. 32 percent of respondents reported that competition for physician hospital investment opportunities has declined, while 18 percent reported that competition has increased. Half reported no change.
- During 2008, 63 percent of respondents reported performing due diligence for physician hospital acquisitions, but only 21 percent of respondents actually completed one or more acquisitions. When bidding on acquisition targets, half of the respondents report 2 to 3 bidders, and 30 percent report 4 or more bidders.
- For 2009, 42 percent of respondents plan to purchase between 1 to 3 physician hospitals. Of these, 10 respondents report plans to close only 1 transaction, and 5 respondents plan to purchase between 2 and 3 hospitals. 65 percent of respondents stated that they were opportunistic with respect to selecting physician hospital opportunities.
- More than two-thirds of the respondents fund their acquisitions principally through debt, while 18 percent fund principally with cash. 71 percent of respondents will consider a purchase opportunity regardless of the magnitude of the investment, while 21 percent of respondents will not consider an investment over $50 million.
De Novo (Start-up) versus Purchase
- One-third of the respondents report that they seek de novo opportunities; 23 percent seek turnaround opportunities; and 43 percent seek established cash-flowing centers.
- For a start-up hospital, 54 percent of respondents reported “buyin” prices of less than $75,000 per 1 percent interest. Respondents were fairly evenly spread on the ownership interest they seek to purchase; however, 42 percent of respondents indicated that a 50-75 percent ownership interest was most desirable.
Preferred Physician Specialties
- The respondents indicated the following strongly desired specialties for physician-investors: orthopedics, spine, general surgery, ENT, and gastroenterology. Cosmetic surgery and oncology were identified as undesirable specialties in a physician-owned hospital.
Management Fees
- The majority of respondents reported management fees ranging from 5-6 percent of net revenue, with 50 percent listing 5 percent as the minimum fee and half of the respondents listing 6 percent as the maximum fee. 73 percent of respondents indicate that they have an equity position in the hospitals they manage, but 68 percent of the respondents indicate that equity ownership has no influence on the level of the management fee charged.
