Coventry has bought all the non-clinic operations of Concentra Inc. (with the apparent exception of Concentra Payment Systems) for $387 million in cash, making the deal worth about 1.2 times trailing 12 months’ revenue.
Here’s my take.
Concentra was looking to get out of the managed care services business for quite some time. The field case management and telephonic case management businesses have not been growing, and margins have been narrowing for several years. The Focus network is facing tough competition from Aetna and First Health (although Concentra has been cross-selling the Aetna WC network). And Dan Thomas, CEO of Concentra, has made no secret of his preference for the clinic business over the services operations.
So Concentra’s motivations are pretty obvious. Less apparent are Coventry’s. Close followers of management pronouncements will not have been surprised by the deal, as Coventry CEO Dale Wolf has been quite clear that the company was looking to acquire businesses would be complementary to the First Health network and bill review.
Strategically, Coventry believes the WC business is a good long term play. Management sees WC as several years behind group health in terms of automation, medical management, and clinical applications. Can’t argue with that. Coventry also is focused on increasing the amount of fee business in its portfolio to better balance its risk (HMO/insurance) business.
By combining the two largest players in the WC managed care market, Coventry creates a tough competitor overnight.
Wolf also can add a lot of bill review volume to First Health’s proprietary bill review application, reducing expenses (and hitting rival Ingenix hard).
Coventry’s recent naming of McGarry as head of WC operations was a hint of a major deal to come; McGarry is well-regarded for his operational abilities, a talent that will be sorely needed over the nxt few months.
This is all well and good, but as I noted in a post a few weeks ago, FH itself has a lot of cleaning up to do. In a conversation this morning with an executive at a major WC payer, the exeec expressed frustration that FH would do another deal before cleaning up its own house.
I’m not surprised that the deal was done, nor am I surprised they did the deal before their own house was in order. That said, it will make McGarry’s job a lot harder.
As for what FH is going to do with hundreds of field case management nurses…
Valuation
At 1.15 times 2006 revenue, the deal appears to be fairly priced, especially because it is all cash. Concentra will undoubtedly use a big chunk of the proceeds to retire more long term debt, and may well use the rest to acquire or build more occ health clinics. This part of Concentra’s business has been growing nicely, albeit on the back of increased utilization, particularly PT.
More to come later.
