by Thomas Rudolf, Oberender AG, Executive Board Member
Dynamic transaction market
Not only the M&A Trend Report 2020 of Oberender AG shows it: the transaction activity in the German hospital market has remained unchanged since 2016. A peak in 2018 was followed by another strong year in 2019. The sold and merged facilities can be clearly characterised by a number of key figures, and there is reason to assume that a dynamic transaction market can be expected in the coming years as well. However, the drivers are changing. Here are five theses:
#1: Takeovers after insolvencies on a rise
The statement has become outdated and yet more topical than ever: the economic situation of hospitals is deteriorating. The legislator is playing its part in this. The Nursing Staff Reinforcement Act, for example, is increasing costs and making it more difficult to adapt nursing processes. Facilities that only four or five years ago generated a sufficiently high operating profit (EBITDA) with a margin of 4% to 6% are in a worse position today. Consequently, the result is no longer sufficient to compensate for the lack of investment funds provided by the federal states.
Due to the corona crisis and falling tax revenues, municipal agencies, in particular, will no longer be able to save every hospital. Therefore more hospital insolvencies can be expected in the next two years. For 2020, the number of closures and bankruptcies should undoubtedly be over 20, even if the forecast has become more difficult due to the effects of the corona pandemic.
#2: Buyers are going to have no interest in small hospitals
Only ten years ago, private clinic groups bought small facilities as soon as one was on the market. There was a competition for hospitals with around 120-beds, resulting in a good price for the sellers. The market situation today is completely different.
Small hospitals – apart from specialised clinics – are often uneconomical. The necessary margins for an economically justifiable operation are less and less achievable. For private investors, these hospitals have thus become unattractive. The actual driver in the market – private equity investors who want to acquire a clinic to found MVZs (medical service centres) legally – often fall through the cracks. They do not see themselves as hospital operators, but basically only want to invest in an outpatient structure. If the economic risk of a hospital takeover is incalculable or simply too high, they refrain from an acquisition.
The development in recent years seems to refute this at first (see figure 1). Especially the hospitals with 100-199 beds were quite often the subject of a transaction. However, this ultimately only shows their economic difficulties. In the future, it will increasingly be the case that small hospitals will be the ones with the most closures.
#3: Privatisation will not be a mega-trend
The days of the great waves of privatisation are over – and they will remain so for the time being. A number of factors are responsible for this. For example, private hospital chains no longer achieve the margins they need for meaningful entrepreneurial activity (e.g. investment capability) with the pure operation of acute care hospitals. In addition, more and more hospitals in the cluster with up to 200 beds are coming onto the market. The necessary profitability will be difficult to achieve. Also, municipal owners, in particular, continue to consider it politically inappropriate to sell their clinic to a private owner. The public views this very critically.
A look at the figures for the last few years (see figure 2) already shows that the carrier-unit acquisitions clearly predominate. Although there are still privatisations, their importance for the transaction market is declining in comparison. This is also important for private financial investors: it will be unlikely to acquire facilities from municipalities.
#4: More municipal mergers
The problem of the market structure in the German hospital system is not only the fact that there are too many hospitals and too many hospital beds. The size of the facilities is also part of the problem of growing deficits and thus, a lack of investment capability. Increasingly, therefore, consolidation tendencies can be observed in the market. This does not only affect large private companies. Mergers such as those of Asklepios and Rhön may dwarf other takeovers and mergers, but their number is growing.
Recently, for example, in Bavaria the mergers in the Allgäu or between the county hospitals in Mühldorf am Inn and Altötting have confirmed the trend. Municipalities see a possibility of realising economies of scale through mergers across counties. By combining this with economic consistency and the will to reorganise, regional champions can be created in the clinic market.
#5: Corporations push vertical integration
But what remains for the private clinic groups? In the future, they will increasingly invest as part of a vertical integration strategy, i.e. especially in the value chain upstream of the hospital (suppliers, medical equipment, digital supply applications, etc.). The reason is quite simple: the margins there are higher, the markets are less heavily regulated, and in some cases, they are already bringing their sales market with them with their existing hospital portfolio or with their own purchasing groups. In addition, politics does not make it any easier for the hospital owners (regardless of the type of owner) to operate sensibly.
The attractiveness of taking over hospitals is decreasing. There will continue to be some facilities that people are happy to take over. However, following the trend of a single entity taking over, much is being prepared outside the public eye until the upcoming signing is announced. A development that already confirms this: large hospital groups have their own M&A departments.
Executive Board Member, Oberender AG
Elsenheimerstr. 59, D-80687 München
Tel.: +49 (0)89 8207516 – 0