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Home Health & Hospice Week

Mergers & Acquisitions:

VITAS Sells For $410 Million

Published on Thu Jan 01, 2004

 Expect the nation's largest hospice chain to go public quickly after sale

Hospice mergers and acquisition activity is almost certain to heat up even more this year, thanks to the pending acquisition of the nation's largest hospice provider.

Cincinnati-based Roto-Rooter Inc. has announced it will buy Miami-based VITAS Health-care Corp. for $410 million by March 15. That will include $335 million in cash and Roto-Rooter's assumption of $75 million in VITAS debt, reports The Miami Herald.

VITAS cofounder, chair and CEO Hugh Westbrook, 58, will pocket $200 million from the sale, and cofounder and vice-chair Esther Col-liflower, 76, will earn "somewhat less," the Herald says. Westbrook will also snag $25 million in consulting fees from VITAS for seven years after the sale.

Analysts expect for-profit VITAS, currently a closely held private company, to go public shortly after the acquisition. It would then join Dallas-based for-profit Odyssey HealthCare Inc., which went public in November 2001, and Scottsdale, AZ-based VistaCare Inc., which went public in December 2002, in the ranks of public hospice chains.

Estimates from The Daily Deal newspaper put VITAS' market value at $1.5 billion, a figure John Mahon-ey, principal of the Summit Business Group in Penfield, NJ, agrees with. "I can assure you that 20-plus years ago, when we were all working on passage of the Medicare hospice benefit, none of us were thinking that the value of a hospice and the phrase 'significantly in excess of $1 billion' would ever be used in the same sentence," quips Mahoney, former president of the National Hospice Organization. Odyssey racks up market capitalization of about $1 billion and VistaCare has a $550 million value, the Deal says.

VITAS, the self-proclaimed largest hospice company in the nation, will remain an independent company with its current management team - except Westbrook and Colliflower - intact in the Miami headquarters, according to press reports.

As for rank-and-file VITAS workers, "we've already told our employees that no layoffs are planned as a result of this transaction," company spokesperson Mark Cohen told the Herald.

Will Hospice Prices Climb Higher? 

Hospice is already a hot sector in the mergers and acquisitions market, notes consultant Schuyler Hoss with Northwest Healthcare Management in Vancouver, WA. "Odyssey and Vista have been aggressive buyers, pushing up the value of individual hospice programs," Hoss tells Eli.

This purchase by non-health care company Roto-Rooter will attract more institutional investors to the hospice market, Hoss predicts. That will mean more acquisitions in store for the industry, which in turn will drive prices even higher.

VITAS itself might add to the trend - while VITAS hasn't been an active acquirer in recent years, it may use its new structure to start buying other hospices. "A successful [initial public offering] will make a fair amount of money available for acquisitions, and could trigger more competition in the acquisitions market," Mahoney predicts.

"Even absent an acquisition of VITAS ... we would probably see more consolidation of the industry over the next several years" due to its current fragmentation, Mahoney suspects. "This acquisition may simply accelerate that consolidation."

But it won't be a never-ending upward spiral for hospice valuations, Hoss cautions. "The growth of the for-profits will be somewhat constrained because most of the undervalued hospices have been snapped up and many recent transactions reflect fully valued acquisitions," he says. "Some recent individual transactions could approach being overvalued," he adds.

The top three hospice companies may turn more and more to organic growth rather than acquisitions to capture market share, Mahoney forecasts.

Increased competition for fewer acquisition targets could mean a reduced number of deals, even though interest in the market is higher than ever, Hoss says. Would-be purchasers are looking to alternative targets, such as hospital-affiliated hospice programs.

Market activity also could be hampered if the industry makes serious missteps, warns Mahon-ey. "A scandal involving fraud or poor quality care might seriously undermine two decades of work by the entire industry," he says.

And if publicly traded companies start reporting "exceptional earnings," hospice providers may lose their cachet with the feds and Congress, Mahoney notes. If the hospice industry's good reputation is marred, fraud crackdowns and rate cuts or freezes could follow.

Plumbing and Hospice: A Perfect Match? 

The pairing of Roto-Rooter and VITAS may seem odd, but Roto-Rooter used to be a holding company called Chemed Corp., which possessed a number of health care subsidiaries, say press reports. It only recently shed those and changed its name to reflect its focus on the plumbing business.

Roto-Rooter bought a 37 percent share in VITAS back in 1991 for $27 million, the Herald reports. Under the deal, it will buy up the remaining shares. Roto-Rooter executive Tim O'Toole, a VITAS board member for 12 years, will head up the company after the sale, according to press reports.

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