Bass, Berry & Sims attorneys Lara Flatau, Angela Humphreys and Frank Pellegrino were interviewed on the Deal Talk with 7MA podcast discussing the evolving landscape of the healthcare M&A space in the wake of COVID-19.
As part of the conversation, the guests identified potential problems that could be faced during a physician practice acquisition transaction, including, as Frank points out, “tension as to who should get more proceeds, who should get less, who may have to rollover, just the dynamics of the group, vis-à-vis where they are in their life stage is one of the most common sticky areas.” Lara added another potential problem can be “how and when to bring in the associate physicians … what does their future look like post-closing?”
The podcast also covered current market interest for physician practices during the COVID-19 environment. Frank noted that “If it’s an attractive asset pre-COVID and it remains an attractive asset during COVID, I’m still seeing interest. I think the challenge is executing the transaction itself – how do you bridge valuation gaps? How do you take into account the temporary dip in volume? How do you take into account the challenges in the credit and debt markets? How do you take into account uncertainties with respect to COVID? … There are still deals being done … There are more complicating factors on how to execute a strategy in an uncertain time.”
Lara continued by saying that transactions are taking “bit longer to bridge gaps that Frank identified, more negotiations of closing conditions and other conditions to do the deal. And also if you have reps and warranty policy, which a lot of these bigger platforms do, what are exclusions to those policies and how you allocate the risk relating to the COVID environment.”
Angela provided the following insight related specifically to private equity investment in the healthcare space, saying there “continues to be private equity interest in the healthcare space, particularly in the physician practice space, continued interest in specialties such as orthopedics, gastroenterology, urology, primary care, ophthalmology and other sectors, many of which have elective procedures that were suspended or paused during COVID-19. While there’s interest, the private equity firms really want to see the resurgence of volume back to a level that it was pre-COVID. Private equity firms want to see at least 90 days of normalized activity, if not longer. And that is resulting in some transactions that otherwise would have been a race to the finish line being worked on but in a slower, more methodical manner as practices ramp back up. It also has resulted in a change in deal terms in many cases shifting more of the purchase price to rollover equity; shifting purchase price, in some cases, to a seller note when there would have been third-party financing; and, in some cases, resulting in an earn-out or contingent payment to be paid with hindsight around COVID-19.”
The podcast, “Successful Physician Partnership Strategies in Today’s COVID-19 Environment,” was produced as part of the Deal Talk with 7MA podcast series and is available on the 7 Mile Advisors website or wherever you get your podcast content.