Why Are Buyout Firms Ready to Risk It on Acadia?

(Bloomberg Opinion) -- Private equity firms appear to have a thing for troubled health-care providers. 

Reuters reported on Thursday that Acadia Healthcare Co Inc., an operator of  mental-health and addiction-treatment centers, is in buyout talks with firms including KKR & Co. and TPG Global. There is no guarantee of a deal, according to the report, which attributed the deal speculation to unidentified people familiar with the matter. Even so, the news sparked a rise in the shares.

Acadia had its value dented just last week after a short-seller alleged that there has been “widespread patient abuse and neglect” at the firm’s facilities. On one level, that makes it appealing as a possible buy-low candidate that could be fixed up out of the glare of public markets. Those are the types of businesses that tend to pique the interest of private equity firms. 

But if those allegations have some truth behind them, they add a heaping helping of extra risk and potential liability to any deal. 

Why Are Buyout Firms Ready to Risk It on Acadia?

Private equity interest in the mental and behavioral health sector has mostly been focused on smaller providers that they have sought to sell to consolidators like Acadia. The company is currently worth $3.4 billion and has a $3.2 billion debt load on its books, so this would represent a big step-up in ambition for buyout firms in the sector. 

In terms of size and risk, recent KKR acquisition Envision Healthcare Corp, which provides emergency-room physicians to hospitals among other services, is arguably a better comparison.

Before KKR bought Envision for nearly $10 billion including debt earlier this month, it had been repeatedly accused of predatory billing practices. Envision’s financial performance was deteriorating and UnitedHealth Group Inc., the country’s largest health insurer and one of the largest health care companies in existence, had recently warned that it may drop Envision’s ER physicians from its coverage. It also attracted short-seller attention, as Congress pursues legislation that could cut down on the sort of surprise out-of-network bills that Envision is accused of sending.

Changing Envision’s business will be a difficult task that could cut into sales and KKR’s ability to squeeze a good return out of the deal, even though it acquired it at a substantial discount to its past highs. 

As for Acadia, short-seller Aurelius Value alleges that there have been undisclosed incidents of sexual abuse and assault as well as possible patient deaths at the company’s facilities that it says are the result of persistent under-staffing or negligence. It further alleges that this is a consequence of the firm’s business model of acquiring facilities and cutting costs. (A spokeswoman for Acadia didn’t respond to requests for comment last week when the report came out.)

If these allegations are even partially true, the company may be exposed to an investigation or legal liability. Fixing such issues would likely require substantial investment that would eat into the profitability of a business that is already operating with a significant debt load.

The demand for addiction and mental health treatment has been bolstered by the Affordable Care Act and likely feels safer now that repeal efforts have fizzled.  Any investigation or ongoing controversy might hamper the ability to use Acadia as a platform for further deals to take advantage of that trend, which is probably a principal appeal for PE firms.

As at Envision, the problems at Acadia may be no quick fix, and the shield of the private market may not provide much cover while repairs are made. The lure of a possible bargain shouldn’t obscure that.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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