Acadia Healthcare (NASDAQ:ACHC) announced yet another acquisition, which sent shares to fresh all-time highs as investors applauded the deal given the large expected accretion to earnings per share.
I believe the deal looks solid on a standalone basis, yet the overall leverage and premium valuation makes me hesitant to jump onto the momentum bandwagon.
Acadia Healthcare has signed a definitive agreement to acquire Partnerships in Care (PiC). The company will pay some $660 million for the second-largest independent provider of inpatient behavioral healthcare services within the UK, holding a market share of 16%. The company has previously been owned by Cinven.
PiC operates 23 psychiatric facilities with a total of more than 1,200 beds. The company reported revenues of $285 million for 2013, on which it reported adjusted EBITDA of $75 million.
The company has arranged committed financing from Bank of America Merrill Lynch (NYSE:BAC), although it expects to pay for the deal in a combination of debt and equity.
The transaction is expected to close as soon as the start of July.
Joey Jacobs, CEO and chairman of Acadia, sees the transaction fitting within the company's strategy, as the UK inpatient behavioral market represents a meaningful and accretive growth opportunity.
The UK independent behavioral market is roughly 8% of the total behavioral market, as the specialized segment represents a $2 billion opportunity in the UK alone. Acadia stresses that since 2004, this market has grown at a 9.2% compounded annual growth rate, driven by the declining support in National Health Services beds being available, amidst budget constraints.
The move outside the US limits the reliance on the US Medicare industry, as well as offers Acadia the possibility to lower its effective tax rates.
Implications For Acadia
The implications of the deal are sizable, with revenues expected to increase by 37% to $1.1 billion, from a reported $713 million for the calendar year of 2013.
For 2013, Acadia reported net earnings of $42.6 million, or $0.86 per share. The transaction is expected to be highly accretive, as PiC has greater operating margins, resulting in an expected accretion of $0.17 to $0.20 per share already in 2014.
Earnings accretion is seen between $0.40 and $0.46 per share by 2015, which results in an expected net income contribution of $22 million next year, after financing costs.
The company already operates with a $660 million net debt position, in a transaction which could double the debt load if Acadia would finance the deal solely with debt. Given the favorable stock market reaction, with shares trading 15% higher at $48 per share, a portion of equity financing is more likely to occur.
Implications For Investors
Acadia has been on an acquisition spree in recent years. In Tuesday's Jefferies Global Healthcare presentation, Acadia stresses that it has acquired numerous companies in deals which added $600 million in revenues over the past three years.
The company has had an excellent track record making these deals, and investors are rightfully applauding the latest move. The latest jump in the equity valuation to $2.4 billion implies a $300 million jump in the market capitalization on Tuesday. This can easily be explained by the expected accretion of the acquisition. That being said, multiples are steep, as leverage is on the rise as well.
Acadia will most likely operate with a billion in net debt following the deal closure, assuming a 50/50 mix in debt and equity financing. Earnings might come in at $75-$100 million next year in good operating conditions, yet the valuation of the equity would have risen towards $2.7 billion at the time, assuming 50% equity financing. This would still result in a steep 30 times earnings multiple for a leveraged healthcare growth play.
As such, I applaud the deal and management's great track record in integrating its past acquisition. Still, I refrain from investing in Acadia given the premium valuation already at today's prices.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.