Transaction Type: Acquisition
Acquirer: The MENTOR Network
Headquarters: Allston, MA
Sector: Healthcare & Life Sciences
Client Summary
Mass ADH (MADH) is one of the largest providers of adult day health services in the country, serving over 1,000 program participants. Adult day health services provide a community setting for disabled and frail patients whose medical conditions require nursing supervision, care coordination and/or supervised daily care. Program services are principally reimbursed by state Medicaid. Nationally, this program has seen strong enrollment growth.
Industry Trends
The adult day health (ADH) industry consists of approximately 4,300 operators generating aggregate revenues of nearly $6.9 billion in 2015. Between 2010 and 2015, the industry grew at a CAGR of 4.0 percent, with the top four companies accounting for less than 5 percent of industry revenue.
As the US population continues to age, government-funded programs such as Medicaid and Medicare are faced with rising costs. In response these programs are shifting to more cost-effective alternatives such as ADH, rather than more expensive acute care options such as nursing homes and assisted living. As a result, the ADH industry is expected to grow at an annualized rate of 5.4 percent to $9.0 billion in 2020.
Customers
Mass ADH customers included:
- Senior Whole Health, an affordable health care plan for “dual eligibles”— people who qualify for both Medicare and Medicaid
- MassHealth, a program comprised of Massachusetts Medicaid and the Children’s Health Insurance Program
Cambridge Health Alliance, an innovative health system that serves over 140,000 patients in Cambridge, Somerville, and Boston’s metro-north region - UnitedHealthcare, the largest global provider of health products and health insurance services
- Ethos, a Boston-based nonprofit organization devoted to preserving the dignity and independence of nearly 2,000 elderly and disabled persons
Situation
Established in 2003, MADH was one of the largest operators of adult day health facilities in the Northeast United States. The ownership group, consisting of seven shareholders, engaged Consilium Partners as its exclusive financial advisor to explore a sale to either a strategic acquirer or to a private equity investor in a recapitalization. Of the seven principals, only two members of this ownership group were active in the day-to-day operation of the business. Due to size and diverse objectives of this ownership group, Consilium was tasked in identifying a buyer that shared the values and strategic objectives of MADH as well as met the collective liquidity objectives of the principals.
Process and Outcome
MADH had fielded a number of unsolicited inquiries over the previous 18 months. They didn’t want a broad (100+ participants) process; instead, they were committed to targeting only a well-curated set of like-minded buyers. To enhance the level of competition while complying with the client’s requirements, Consilium recommended a two-stage managed auction process with a well-developed set of prospective buyers. Consilium researched and prepared a select list of strategic buyers and private equity groups with particular interest and specialization in community-based healthcare services. This list included nearly 70 potential investors, of which MADH selected approximately 40 parties for Consilium to contact.
The response was strong, with 50 percent of the contacts requesting the confidential descriptive memorandum (CDM). Consilium received eight indications of interest (IOIs). All bids were at or above the range of values the client was seeking. MADH selected five parties to participate through the second phase of the process, which included management presentations. Three of the five parties subsequently submitted very strong letters of intent (LOIs). The remaining two parties elected not to move forward after requesting that the two primary operating principals retain active roles for an extended period of time – a condition that was inconsistent with the client’s objectives.
MADH chose The Mentor Network because of its overall superior proposal and the compatibility of its values and strategy with those of MADH. In addition to a premium valuation, over 92 percent of the total consideration was paid at closing with the remaining balance structured as a two-year earn-out, 95 percent of which was ultimately achieved. Finally, the transition period for the two primary operating principals was held to 12 months. This transaction outcome satisfied all liquidity and transition requirements of the seven principals.