Frowning George on a weak dollar

Investors on the prowl for home care and hospice properties are encountering two  somewhat unfamiliar obstacles: rising inflation and interest rates — the likes of which the industry hasn’t seen in 40 years.

“We’re not in uncharted waters with inflation, but the charts are so old they may have dragons on them,” Tom Lillis, a partner in M&A advisory firm Stoneridge Partners, said jokingly to McKnight’s Home Care Daily Pulse.

Recent developments present a sobering reality. On Wednesday, the Federal Reserve Board hiked short-term interest rates a quarter of a percentage point and is expected to hike them at least six more times this year. The Fed’s move followed February’s 0.8% rise in the Consumer Price Index, which is up 7.9% in the past 12 months.

Rising interest rates make borrowing more expensive and that can derail mergers and acquisitions. However, M&A experts say that might not necessarily happen for the home care and hospice industry, which has enjoyed back-to-back blockbuster years for deals.

Attractive segment

A number of factors, including an aging demographic, growing demand for home-based care and legislation supporting home care, such as the Choose Home Care Act, continue to make investing in home care and hospice attractive.

“Investors continue to see healthcare services companies as great places to put their money,” Andre Ulloa, partner with M&A Healthcare Advisors, told McKnight’s Home Care Daily Pulse. “In these volatile times, finding a point of certainty is extremely valuable.” 

Still, the rate of inflation and its pressure on interest rates remain wildcards for the home care and hospice industry. The shortage of available workers during the COVID-19 pandemic has put pressure on wages for the past two years. The increase in gas prices in recent months has intensified this development further, crimping profit margins for many agencies.

“The staffing challenges preceded inflation, but they are also certainly impacted by [fuel prices],” Lillis said. “Who knows when that is going to end.”

Rethinking deal structures

The uncertainty over inflation and interest rates could affect the way deals are structured. Stoneridge Partners Managing Director Brian Bruendman told McKnight’s Home Care Daily Pulse that buyers, such as private equity firms, may choose to acquire majority stakes in agencies, rather than buy them outright. 

“A lot of folks find that structure in the right scenario and the right situation pretty interesting,” Bruendman said. “If it’s coming with a seasoned management team and an extended transition period, it is attractive to certain people, especially those who are just entering the space.”  

Large home care and hospice firms don’t yet appear to be rethinking their M&A strategies for 2022. During an investor conference earlier this week, LHC Group Chairman and CEO Keith Myers said the dozen deals the company completed last year and the income they are generating pave the way for more deals this year. Myers expressed continued optimism for the industry.

“All signs point to a trend of growing demand for quality healthcare services delivered in the home, especially in a post-COVID environment,” Myers said.