Tenet commits nearly $1.5B to secure ownership of 92 more SurgCenter ASCs, with option to add 50 more

Tenet Healthcare and its ambulatory care subsidiary announced Monday the acquisition of SurgCenter Development’s ambulatory surgical center business for approximately $1.2 billion.

While the portfolio purchase is set to increase United Surgical Partners International's (USPI's) reach to more than 440 facilities across 35 states, Tenet executives told investors its position in the ambulatory care market is slated grow even further in the coming years, thanks to a concurrent development partnership with SurgCenter and other anticipated merger and acquisition plans to come.

“By welcoming these centers into our company, USPI will maintain its reach as the largest ambulatory platform for musculoskeletal services, a high-growth service line,” Tenet CEO Saum Sutaria, M.D., said in the acquisition announcement. “We are also creating a pathway for further expansion through a partnership that pairs the expert development and operational capabilities of our two organizations.”

SurgCenter owns the minority interest in 86 ambulatory surgery centers (ASCs) and a majority interest in another six. The company considers 65 of these to be “mature” facilities, with the remaining 27 having either opened in the last year or set to start performing their first cases in 2022.

Alongside the purchase of these stakes and other ambulatory support services, Tenet said that it is setting aside roughly $250 million to purchase additional equity interest in the 92 ASCs from their physician owners so it can reach majority ownership.

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The centers come with an “attractive” case mix across several service lines but primarily deliver musculoskeletal care, Tenet said. They are spread across 21 states, including “high-growth” regions within Arizona, Florida and Texas.

The companies said they are expecting the deal to close in the fourth quarter of 2021, subject to approvals. Tenet is planning to finance the purchase through the issuance of first-lien secured notes and expects the transaction to be leverage neutral.

Beyond the purchase plans, the companies announced a five-year partnership and development agreement between USPI and SurgCenter that aims to provide continuity of the latter’s platform.

Here, the partners said they are committing to the development of at least 50 new ASCs led by the SurgCenter team. USPI will have the exclusive option to obtain an ownership position in these centers immediately and will also have the option to purchase the SurgCenter principals’ stake up to 18 months after the centers are opened.

A 'tremendous accelerant' for Tenet's high-margin ambulatory business

Tenet and SurgCenter’s arrangements come nearly a year after the announcement of a 45-ASC handoff between the two companies.

That previous deal (which later expanded to 49) lays the groundwork for Tenet’s upcoming equity interest purchases, executives said during a pair of virtual presentations following the announcement.

The initial 45 centers were relatively established, Sutaria said, and had a first-year EBITDA minus non-controlling interest (EBITDA-NCI) of $130 million in in their first year before eventually reaching $160 million EBITDA-NCI once ramped up.

Assuming Tenet completes its buy-ups for a “large portion” of the 65 mature centers of the upcoming portfolio acquisition, the company is projecting approximately $175 million in consolidated EBITDA by the end of its first year. After the newer centers begin to generate earnings in 2022, Tenet said it expects the transaction to be generating “double-digit returns” on its investment within three years of completion, thanks in large part to USPI’s ability to deliver synergies across the business.

“So we’re very excited about the growth potential of those facilities, even greater than what we saw in the first and separate transaction we did about a year ago,” Sutaria said Tuesday during a virtual presentation for the Credit Suisse Healthcare Conference.

Executives said that they are confident in their ability to executive the $250 million in subsequent buy-ups, again due to its experience in the prior deal.

Sutaria and USPI President and CEO Brett Brodnax said Tenet was able to secure a majority stake in every ASC included in last year’s deal. As before, Tenet plans to present physician owners an offer structured on fair market value that does not vary significantly from center to center, Brodnax said, and the company is expecting minimal physician attrition following the transactions.

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The new development partnership with SurgCenter also opens up a “tremendous accelerant for growth” for USPI in the coming years, Sutaria said. The subsidiary was already on track to develop 15 to 20 new ASCs annually, so adding another minimum of 10 per year places the division on pace to grow by 125 to 150 new centers over the next five years.

Brodnax stressed that the two companies have historically adopted unique criteria for their ASC development platforms. USPI has generally relied on a combination of acquisitions and establishing new centers, whereas SurgCenter has exclusively doubled down on the latter.

“There’s not a whole lot of overlap in terms of our development engines, so it’s not like we’re going to be cannibalizing their opportunities or they’re going to be cannibalizing our opportunities. We essentially pursue different types of transactions at different physician groups, so it’s very complimentary in terms of our two development engines [and] how they produce results," he said.

These growth plans alongside a commitment to pursuing additions acquisition opportunities yet to come underscore Tenet’s interest in establishing high-margin ambulatory care as a staple of its overall care delivery business, Sutaria said.

“At the end of 2019, USPI had about 285 centers in the surgery business with roughly $550 million in EBITDA-NCI. Margins were about 40%,” he said. “These two separate deals add about 140 centers, what we project to be about $365 million in EBITDA-NCI when ramped up, which means USPI will be about two-thirds larger than it was right before the pandemic relative to what we’re poised to do with this portfolio today—and we think the margins will actually … creep up a little bit higher, in the low 40s range.”