Updated 11:20 a.m. with information from today's conference call, analyst comments
The special board committee set up to handle the sale of Psychiatric Solutions has agreed to terms with Universal Health Services, which will pay about $2 billion for the Franklin-based company.
Pennsylvania-based UHS (Ticker: UHS) will pay $33.75 per Psych Solutions share and assume the company's $1.2 billion debt load. The deal, which will create a $7 billion company, is expected to close in the fourth quarter. UHS has secured $4.15 billion in debt from JP Morgan Chase and Deutsche Bank to finance the deal.
“This transformative transaction is very compelling for shareholders, patients and employees of both companies,” said Alan Miller, chairman and CEO of UHS. “The combined company will have ample opportunities for further growth in both the acute care and behavioral health care sectors.”
On the behavioral side, the transaction nearly doubles UHS' facility count, giving it a total of 196 centers with 19,000 beds. The company has 25 acute-care facilities with about 5,500 beds.
UHS CFO Steve Filton said there's a high demand for service in the $20 billion behavioral health segment. Though the deal will make UHS the largest provider of behavioral health services, he noted that the company's position will still represent only a small percent of the industry's overall capacity. With an expanded platform in behavioral health care, the company is "strongly positioned to capitalize on growth opportunities in the years ahead."
Shares of Psych Solutions (Ticker: PSYS) closed Friday trading at $32.63 and have risen 54 percent this year. As Jacobs and his team have built the company over the past seven years, the stock has risen about 590 percent, more than 10 times the Nasdaq Composite's gain over that time.
Synergies and PSI's management
The obvious question raised by this morning's announcement was: What will become of Psych Solutions' senior managers? UHS anticipates cost savings of about $40 million over three years and expects the deal to be "significantly accretive," but in the companies' news release this morning, only director Chris Grant – who chaired the special board committee – spoke on behalf of Psych Solutions.
There was no mention of Chairman and CEO Joey Jacobs, which may mean that he and other senior executives won't stick around beyond the integration phase. Several analysts have recently said they expected such a turn of events and a report late Sunday from The Wall Street Journal suggested one reason the deal talks had taken longer than expected was a long-standing personal rivalry between Jacobs and Miller.
Filton was more explicit on this morning's conference call:
"The most significant portion of the cost synergies will come from the elimination of salaries and equity-based compensation for [PSI's] senior management team. That represents about 35 to 40 percent of our cost saving synergy number." The synergy number does not include any other specific salary or expense cuts.
Miller, however, was quick to add that "there are some talented senior managers" UHS may bring on to strengthen its leadership ranks. But the overall tone of the call was that of an acquiring company confident in a more mature business, "very long-tenured management team" and superior operating model.
Filton said UHS has the opportunity to apply its managerial and operating expertise to improve PSI's operating margins, which are about 300 basis points below those of UHS.
"Psych Solutions is a much younger company, much more sort of focused on rapid growth," he said. "I don't know that they've had as many opportunities to really cement and organize and discipline their operating model in the same way that we have, so our hope would be that it would really be just the introduction of that sort of discipline would help us close that gap."
Local R.W. Baird analyst Whit Mayo called the transaction very low-risk. Given that UHS is a direct PSI competitor, it has been part of the due diligence process and bid on many of the same facilities as PSI over the past eight years. That means it's already familiar with the hospitals and markets it's acquiring.
Filton touched on that point in his comments this morning, noting that in cases where it was outbid for facilities by PSI, it's now getting those assets at a "much cheaper price than than we first saw them at."
Of course, the deal is still subject to approval from PSI shareholders and the Federal Trade Commission. There's a roughly $71 million breakup fee attached to the deal.
The FTC approval should not be an issue, according to local RBC Capital Markets analyst Frank Morgan. The FTC is mostly worried about local market share monopolies that would allow a provider to jack up prices, Morgan said. There's little risk of that in this deal because UHS and PSI have minimal market overlap and the government sets Medicaid and Medicare reimbursement rates, he explained.
Filton said there are a limited number of markets that will likely come under the government's review, and it intends to respond and close the transaction in Q4.
"If there was ever a transaction we'd be comfortable with, this is it," Filton said. "In a business we know, with a very experienced management team, this is the opportunity we've sort of been working for for a long time."
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- JACOBS, JESSICA ALEXANDRA; JACOBS, ERIKA BESS