Lake Forest-based home healthcare provider Apria Healthcare Group Inc. has seen buyer interest, but a sale could be drawn out because of a lawsuit, debt and Medicare issues, analysts said.
There’s been no word from the company nearly four months after Apria said it hired Morgan Stanley & Co. to look at potential buyout offers.
Apria, which provides breathing treatments, drugs and medical equipment to patients in their homes, said in June a sale could come,if at all,by year’s end.
Normally talkative Apria Chief Executive Larry Higby passed on an interview for this story. Spokeswoman Lisa Getson also declined to comment on the status of a possible sale, saying Apria was in a “quiet period.”
Of course, a deal could be in the works. But analysts said they aren’t surprised that nothing’s come about yet.
“We believe the company has received credible expressions of interest but the sale process may be slow until (a lawsuit) is settled and reimbursement is clarified this fall,” said Legg Mason Inc. analysts Jerry Doctrow and Eric Gommel, in a report after Apria announced hiring Morgan Stanley.
The “suit” refers to litigation that claims Apria submitted incomplete or inaccurate documents for its Medicare billings in the mid-1990s. The company gets about 30% of its roughly $1.5 billion in yearly revenue from Medicare.
Apria has signed a preliminary deal with the federal government to settle the suit for $17.6 million. Apria wouldn’t admit wrongdoing if the settlement is finalized.
There are other factors to consider for prospective suitors.
Apria has seen lower profits this year after reimbursement cuts stemming from the Medicare Prescription Drug, Improvement and Modernization Act. In the first and second quarters, Apria’s profits were off about 20% from a year earlier.
Then there’s debt. Apria had about $500 million in long-term debt as of June 30, up from $475 million at Dec. 31.
“We think that it is unlikely that a financial or strategic buyer would pay even the current price, given the low growth and limited free cash flow available to cover the cost of debt,” Wachovia Securities analyst William Bonello wrote in a recent report.
Last week, Apria had a market value of about $1.7 billion. Some have suggested the company could sell for $2 billion.
Buyers considering a leveraged buyout might be turned off by the interest expense such a deal would include, according to Bonello.
Apria “does not have significant amounts of free cash flow to cover the incremental debt from a leveraged buyout,” he said. “We believe that Apria would need to eliminate most of its acquisition spending in order to cover this level of interest expense.”
The company has grown in large part through a strategy of acquiring small home-based healthcare companies. Higby has said he sees that as the bright side of Medicare cuts,small players may not be able to absorb them, leaving Apria with more takeover targets.
But Apria’s acquisition strategy “may be masking a deteriorating core business,” Bonello said.
Even with $140 million in acquisitions in the past year, Apria’s second-quarter earnings before taxes were flat with the first quarter and down from a year ago, he said.
The buying may not be offsetting the impact of Medicare cuts. In January, Apria saw reimbursement for its breathing treatments for Medicare patients cut by about 8%. Breathing treatments are about 68% of Apria’s business.
Apria and others won a dispensing fee to help offset the cuts. But now the Centers for Medicare & Medicaid Services are considering a cut in the fee for 2006.
The company not only opposes a cut but contends the fee should be indexed with inflation.
Debt and shrinking profits could make Apria a play for private equity buyers, who could see prospects for cutting costs and paying down debt as a prelude to another sale or public offering.
A year ago, Apria said it talked with Blackstone Group LP, Warburg Pincus LLC and Madison Dearborn Partners LLC to be bought for about $2 billion. That deal was scuttled over a sale price.
Potential Buyers
Other potential buyers are companies that provide gas to healthcare, chemicals, food and semiconductor industries. They include Praxair Inc. of Danbury, Conn., and Air Products and Chemicals Inc. of Allentown, Pa. Both companies have market values in the billions of dollars.
Arthur Henderson, a Nashville-based analyst with New York investment bank Jeffries & Co., said in a report, “One of the bigger industrial gas guys has looked at this company in the past and has chosen not to do it.”
Praxair and Air Products wouldn’t comment for this story.
Rivals that provide healthcare services to the home also could be interested.
“Apria operates a number of different businesses in home healthcare,” said Balaji Gandhi, an analyst who follows Apria for Pacific Growth Equities LLC, a San Francisco-based investment bank. “Accordingly, I think there are a number of strategic players in each business segment that could be interested in Apria.”
Those could include a pair of Florida-based Apria rivals, Lincare Holdings Inc. of Clearwater, and Orlando’s Rotech Healthcare Inc. They have businesses that are more concentrated in the home respiratory market, according to Gandhi.
“Given their role as industry consolidators, I would not be surprised to see Lincare or Rotech inquire about Apria’s respiratory assets,” Gandhi said.
Officials from Lincare and Rotech didn’t return calls.
This isn’t the first time Apria has looked at being acquired.
Apria retained Goldman Sachs & Co. back in 1997 to assist with what it called a “strategic review” at a time when Apria’s market value was about $900 million.
