UHS goes big in behavioral health with $3.1 billion acquisition

Universal Health Services Inc., in King of Prussia, Pa., has signed a definitive agreement to purchase behavioral health provider Psychiatric Solutions Inc., in a $3.1 billion deal ($2 billion in cash and $1.1 billion in net debt). The acquisition is "a truly compelling transaction," said CEO/Chairman Alan Miller during an industry conference call. "UHS and PSI are the nation's largest operators of freestanding psychiatric inpatient facilities. This is a unique opportunity to combine forces to transform our behavioral business into the premier franchise in the industry."

Franklin, Tenn.-based PSI had received an offer from private equity firm Bain Capital LLC before UHS entered the fray. Bain then pushed its bid above the initial UHS price of $33.50 per share, reports Bloomberg Businessweek. However, UHS won the battle at a final price of $33.75 per share and expects to close in fourth-quarter 2010.

The acquisition will give UHS $7 billion in combined 2009 pro forma revenues and $1.1 billion in combined 2009 EBITDA (earnings before interest, taxes, depreciation and amortization). Roughly 45 percent of the pro forma revenues derive from the behavioral business. The remaining 55 percent relate primarily to acute care. "In terms of EBITDA , the mix would be approximately 54 percent behavioral and 46 percent acute. The behavioral health business has historically been a higher margin business, which we think bodes well for our positioning and valuation," said UHS Senior Vice President and CFO Steve Filton.

PSI has 94 behavioral facilities totaling 11,290 beds. Added to UHS's 102 facilities and 7,921 beds, the combined company will have 196 behavioral health facilities with more than 19,000 licensed beds. "On the acute side, we will maintain our 25 facilities that hold almost 5,500 beds," noted Filton. UHS will expand its current presence in 32 states, as well as gaining operations in five additional states.

UHS expects to realize $35 to $45 million in annual cost synergies, "with the majority of these savings coming in years one and two," said Filton.  Eliminating the compensation of PSI's senior management team "represents probably 35 to 40 percent of [those] savings."

UHS has $4.15 billion in fully committed debt financing from by JPMorgan Chase Bank N.A. and Deutsche Bank AG. "While we are taking on significant leverage, we will still maintain a strong balance sheet and liquidity," said Filton. "Also [PSI] provides attractive cash flow, and we intend to use the excess cash flow to reduce our leverage in the near term." However, Moody's Investors Service has placed about $600 million of UHS rated debt under review for possible downgrade, according to a company press release.

PSI is not without problems. The U.S. Department of Justice recently subpoenaed the firm seeking documentation related to executive pay, stock options, stock sales and investor communications. PSI has suffered multiple negative headlines over the past few years involving violence, sexual abuse and neglect at several facilities, reports ProPublica. PSI facilities also have been sanctioned by regulators in several states, with Florida recently prohibiting admissions to a PSI facility for children and adolescents after finding repeated deficiencies that put patients in jeopardy. UHS will work with PSI clinical staff "to ensure that at all of our facilities we are providing the utmost level of high-quality patient care," said Filton.

To learn more:
- read the Securities and Exchange Commission merger agreement filings
- read the conference call transcript
- read this Philadelphia Inquirer article
- read this Tennessean article
- read this Nashville Business Journal article
- read this Bloomberg Businessweek article
- visit the Moody's website
- read the UHS press release
- take a look at this ProPublica article

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