Healthcare M&A: A Trend Worth Following

Jump on board and ride the wave of takeovers in the sector

By Bryan Perry

When a sector becomes as fundamentally compelling as healthcare has, deals start to happen at a quick pace. A lot of money can thus be made from the seismic shift within certain industries, and the subsequent wave of takeovers.

With Obamacare set to line the pockets of healthcare providers starting in 2013, the next wave of deals is already hitting the healthcare sector even before the law has gone into full effect. The conventional thinking is that, even if Mitt Romney wins in November, a major portion of the Affordable Care Act will survive, and thus the “urge to merge” is in full swing.

REITs Ready to Ride a Successful Stimulus
REITs Ready to Ride a Successful Stimulus

Last month, for example, Aetna (NYSE:AET) announced the acquisition of managed care provider Coventry Healthcare (NYSE:CVH) for $7.3 billion, or a 23% premium to its Aug. 19 closing price. Not bad.

Just two days later, Healthcare REIT (NYSE:HCN), the nation’s largest REIT in the sector, announced a $1.9 billion takeover of Sunrise Senior Living (NYSE:SRZ) that represented a 62% premium to the Aug. 21 close, and just bought a majority stake in many of SRZ’s properties.

This chain reaction of events has sparked more speculation on which company might be next, just as the Obamacare program has caused a tidal wave of fresh interest on how to cash in on this new tsunami of government spending.

The spending spree comes at a time when the demographic data support being long some of the healthcare REITs. Estimates from Pew Research are that 10,000 boomers turn 65 each day — a phenomenon that will continue until sometime in 2030. REITs that own hospitals, long-term care facilities, assisted living housing, rehabilitation centers, ambulatory centers, nursing homes and senior communities are going to flourish during the next 10 years under any form of healthcare legislation.

It just makes sense to up exposure in the sector at this time, and the industry is still fairly fragmented, with many opportunities for Monday-morning merger headlines.

Medical Facilities Corp. (PINK:MFCSF) is a top contender in this area. MFCSF provides a cash flow from businesses to investors by issuing income participating securities (IPS). These represent a direct interest in a dividend-paying common share and interest-paying subordinated note. The company is confident enough to own a healthy 51% interest in its own facilities. And did I mention that it currently has a 7.8% yield?

Medical Facilities Corp. is headquartered in Toronto, but operates four specialty surgical hospitals in Sioux Falls, S.D., Rapid City, S.D., Aberdeen, S.D., and Oklahoma City as well as an ambulatory surgical center in Newport Beach, Calif. These specialty hospitals are dramatically different from traditional hospitals.

First, the hospitals attract patients by offering “five-star hotel” accommodations and service. They can do this because they focus on a limited number of procedures. The surgical hospitals specialize in orthopedic and neurologic surgery, pain management, podiatry and post-operative needs. The ambulatory surgical center provides outpatient procedures in the areas of general surgery, gastroenterology, gynecology, orthopedics, podiatry, otolaryngology, pain management and plastic surgery.

Basically, MFCSF hospitals provide patients with an alternative to traditional hospital care. And their surgeons receive some perks from this type of work environment, including simplified administrative procedures, efficient turnaround time between cases and the ability to schedule consecutive cases without pre-emption by emergency procedures. It’s funny how when left to the forces of competition, even the healthcare industry will find better ways to operate and make money. It seems like the perfect candidate for a larger company to acquire.

MFCSF is a buy under $15.

All in all, the momentum is just too broad and too powerful to impede success for the savviest acquirers of properties. Healthcare REIT, Ventas (NYSE:VTR) and HCP (NYSE:HCP) are the three largest healthcare REITs by a wide margin, and all three have been on a buying spree since long before the Supreme Court upheld the mandate that pays for Obamacare. I think it’s a matter of when — not if — for the next round of M&A action.

Bryan Perry is editor of Cash Machine, a newsletter focused on dividends and income investing.

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