In the third installment of its COVID-19 M&A Environment: Dealmaker Perspectives Series (a recording of which can be found here), Bass, Berry & Sims, in partnership with valuation advisors from Houlihan Lokey, discussed the effects of the pandemic on joint venture transactions within the healthcare industry.
Key takeaways from the discussion include the following:
Changing Priorities
In the view of the panelists, because of COVID-19, while some stakeholders are reevaluating operating and capital budgets for existing joint ventures and are less likely to form new ones as they focus their attention on day-to-day operations and crisis management, others are viewing the current environment as an opportunity to form new partnerships. For example, several hospitals and health systems have looked at accelerating partnerships with other operators to outsource certain service lines.
Re-Negotiating Terms
In the wake of COVID-19, existing joint ventures with EBITDA and other financial metrics serving as the basis for certain triggers are looking back at these terms and adjusting them accordingly. Going forward, the Bass, Berry & Sims panelists recommended parties forming joint ventures that will use financial measures to trigger buy-sell and other rights should carve-out pandemics and other non-recurring financial events from the applicable calculations so that such events do not affect the parties’ anticipated rights.
Other terms for existing joint ventures that may require reexamination or renegotiation—or for future joint ventures that may require careful consideration—include force majeure provisions; governance rights, including the ability to control strategic and budgetary decisions; operational and growth covenants; and restrictive covenants.
Finally, panelists from Houlihan Lokey discussed the need to revisit valuation provisions—given fixed-price and formula-based valuation arrangements may no longer capture the fair market value (FMV) of joint ventures—and recommended on a go-forward basis use of valuation provisions which defer FMV assessment to independent third-party appraisers.
Valuation Challenges
The panelists from Houlihan Lokey shared some of the current challenges in valuing a joint venture (e.g., uncertainty around the extent and duration of the pandemic and possible delays in or changes to payments from patients and payors), which has caused decreased revenues, increased expenses, and disruption to cash flow nearly industry-wide (with telemedicine presenting as one of the few exceptions).
To address these challenges, valuators are extending their review of a business beyond the usual “last twelve months” (LTM) period, when possible, and in some cases relying on 2020 budgets in place of 2020 actual operations—particularly for Q2 of 2020—to ascertain a business’s value in the absence of COVID-19. However, given the decreased volume of transactions over the last several months, there is also uncertainty around the accuracy of transaction multiples (especially for transactions involving private companies).
CARES Act Funding
According to Bass, Berry & Sims panelists, when negotiating a joint venture transaction, it is important to diligence the other party’s CARES Act funds (e.g., advances and Payroll Protection Program (PPP) loans), including for purposes of determining the amount of funding that may be retained by the parties to the joint venture, and how the retained funds may be allocated, as well as, with respect to PPP loans, whether the party receiving a PPP loan anticipates that the same will be forgiven.
PPP Loans & Consents
Bass, Berry & Sims panelists also discussed the fact that unless and until a PPP loan is repaid or forgiven, the parties to a joint venture transaction must carefully study the notes and other loan documents evidencing PPP loans as they typically require not only the consent of the lender but also the consent of the U.S. Small Business Administration (SBA) to a transfer of assets and/or change of control, which might apply in the context of the joint venture transaction. It has been the experience of the panelists that many transactions are being held up—or restructured, including by providing for a delayed closing—pending lender and SBA consent.
Conclusion
As a result of the items noted above, and for other reasons discussed during the presentation, including the simple fact of parties not being able to travel and conduct in-person meetings with the same relative ease they previously would have been able to, joint venture transactions are lengthier and more complex as a result of COVID-19.
We welcome the opportunity to discuss any of these takeaways with you or other topics of interest. Should you have any questions, or suggestions for future topics, please feel free to reach out to one of our speakers.
To access the recording and key takeaways from other webinars in the series, click the links below: