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LifePoint Deal Shows Healthcare Services Assets May Be Undervalued

Analysis  |  By Philip Betbeze  
   July 23, 2018

Merger will bring together private equity firm's RCCH HealthCare Partners and LifePoint to form a rural hospital company with 84 hospitals in 30 states.

The merger that will combine LifePoint Health and RCCH HealthCare Partners shows that public markets may be undervaluing healthcare assets.

Apollo Global Management, a private equity firm that made the $5.6 billion deal possible, already owns RCCH, and the deal will combine the two hospital operators. Apollo plans to pay $65 in cash per share of LifePoint stock, which is more than 35% higher than the price they closed at Friday, the last day of trading before the deal was announced. Its shares had lost 27% in the past year.

Related: LifePoint Shares Rise 34% on News of $5.6B RCCH Merger

But the public markets may reflect shortsightedness.

  • Private equity has found healthcare a hot bet on in recent times. Multiples are high, but as the LifePoint deal makes clear, many feel bargains are to be had.
  • LifePoint's strategic model is somewhat unique, which may prove to be a positive to the private equity firm. It does acquire hospitals and health systems outright, but will also structure deals as partnerships.
  • LifePoint is not wedded to a single type of partnership. It will partner directly with local hospitals that seek management expertise in return for a share of the local health system's assets and profitability.
  • It also has partnerships with larger health systems, such as Norton Healthcare in Louisville, and its 14-hospital partnership with Duke University Health System is groundbreaking in that it combines the operational skills of a for-profit hospital company with the clinical skills and reputation of a top-shelf academic medical center. Originally intended to leverage Duke's reputation in the Carolinas, the model has since extended to states far from Duke's home base.
  • It remains aggressive in its niche, which is rural hospitals, and is at the forefront of the consolidation trend. Rural hospitals have less competition than their suburban or urban counterparts.
  • As a CNBC report on the deal notes, hospitals operate under lower tax rates than the typical company, and are insulated from possible trade wars that threaten the profitability of more internationally focused businesses.

The new company, which will be taken private under the LifePoint name, will be led by current LifePoint Chairman and CEO William F. Carpenter III, reflecting Apollo's confidence in his vision.

More broadly, the deal represents yet another vote of confidence in healthcare as an attractive investment option despite what the public markets may reflect.

Overall, since the recovery from the financial crisis of 2008, private equity's greatest challenge has arguably been finding attractive investment opportunities. A recent piece in Forbes about private equity's infatuation with retail healthcare argued that one reason healthcare is so attractive to private equity is that the sector is high-margin and fragmented, which is a siren song to dealmakers.

To them, healthcare still represents an opportunity for bargains in a sea of overpriced assets.


Philip Betbeze is the senior leadership editor at HealthLeaders.

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