If I had to guess the sort of healthcare company that would get a premium acquisition offer, Lincare (Nasdaq:LNCR) would be low on my list, as relatively few buyers would want to pay a premium to get into a business that is beset by constant reimbursement pressures. But, as the old saying goes, you only need one buyer to make a deal and Lincare found that one.
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In a deal that reverses a spin-out from nearly 25 years ago, German industrial gases company Linde will be acquiring Lincare for $4.6 billion in total considerations. That works out to $41.50 per share for Lincare's shareholders; a 22% premium to Friday's closing price (which had been moving up on takeover rumors) and a whopping 67% premium to the stock's three-month average price.
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What Is Linde Buying?
Linde is getting the nation's leading provider of in-home oxygen/respiratory therapy, with a national share of about 28%. Lincare has long been an exceptionally well-run company with strong management; management has built Lincare through a series of tuck-in acquisitions and has navigated the company through several challenging periods.
A lot of those challenges come from the nature of the business. Like home-care providers including Amedisys (Nasdaq:AMED) and LHC Group (Nasdaq:LHCG), Lincare gets a large amount of its revenue from the federal government - roughly 60% of the company's revenue comes from Medicare or Medicaid. With a large part of revenue subject to competitive bidding, a three-year limit on equipment rentals and ongoing rate cuts, the operating environment has been simply brutal of late.
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And yet, Lincare has persevered. Lincare has managed to leverage its scale to drive down operating costs, and has repurchased roughly one-third of its shares over the past five years. At the same time, the company has tried to diversify away from its heavy dependence on oxygen therapy by building a specialty pharmaceutical business centered on anti-coagulation and pulmonary therapy.
Why Pay so Much?
To a certain extent, I can appreciate why Linde wants to expand its healthcare operations. The industrial gas business is very competitive and highly cyclical, and healthcare is a popular choice for companies looking to diversify (consider the example of Fujifilm). Moreover, other industrial gas companies like Air Products (NYSE:APD) and Praxair (NYSE:PX) have moved into the healthcare field to varying degrees (in fact, Linde bought Air Products' southern European healthcare business earlier this year).
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All of that said, Linde is certainly paying a lot for this diversification. Lincare's market share is solid, and lends certain operating advantages, but it offers no respite to reimbursement pressures. Moreover, I find it hard to believe that there were competitive bidders forcing Linde to pay so much. As it stands, Linde is paying almost $10 (or 30%) more than I thought Lincare was worth, and the deal probably won't be materially additive until 2015 - and that's assuming there's no major downturn in reimbursement in the meanwhile.
The Bottom Line
Kudos to Lincare management for securing a great deal for its shareholders. To sell a Medicare-dependent business at a 25% premium to its all-time-high deserves more than just a pat on the back. Honestly, I cannot see why any Lincare shareholder wouldn't be thrilled with this deal.
I would not extrapolate this deal across the wider healthcare services group. True, there are quality names out there like AmSurg (Nasdaq:AMSG), Acadia Healthcare (Nasdaq:ACHC) and HCA (NYSE:HCA), and this bid from Linde proves that there's always a chance for a premium bid, but I just don't see a surplus of buyers willing to pay such high premiums today.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.