[July 29, 2014]

Fitch: Consolidation of Healthcare Providers Raising Questions for Investors on Credit Risks

Link to Fitch Ratings' Report: Lateral Consolidation of Healthcare Providers (Is the Whole Greater than the Sum of the Parts?)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753102

The ongoing consolidation of U.S. healthcare providers is bringing benefits for some acquirers but also posing unique credit challenges for investors, according to a Fitch Ratings report.

A dynamic operating environment is encouraging some healthcare management teams to look beyond relatively low-risk horizontal consolidation in favor of transactions that bring different care-delivery verticals under common ownership. Although these transactions might offer less benefit in terms cost synergies, revenue synergies may be gained by treating a single patient through a broader spectrum of care. Perhaps most importantly, Fitch notes that diversified healthcare providers may realize a first-mover advantage under value-based payment schemes.

'Scale in healthcare delivery brings clear financial benefits to manage secular headwinds to organic growth and profit margins,' said Megan Neuberger, Senior Director, Fitch Ratings. 'In any transaction, however, investors need to ask whether the whole is greater than the sum of its parts given the credit risks.'

Integrating an acquisition in an adjacent care-delivery vertical is complicated and the risk should be tempered by a strong strategic rationale supporting a diversified business model. The credit implications of any acquisition partly depend on Fitch's assumptions regarding the contribution of financial synergies to pro forma EBITDA. Fitch typically takes a more conservative approach to the modeling of presumed revenue than cost synergies associated with a merger.

The full report 'Lateral Consolidation of Healthcare Providers' is available at 'www.fitchratings.com.' The report provides commentary and analysis of several recent large transactions.

Additional information is available at 'www.fitchratings.com'.

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