Deal Diagnostic: Addus (NASDAQ: ADUS) Acquires Queen City Hospice from Stonehenge Partners

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Consolidation in the home health and hospice industry has picked up in recent months, as uncertainty brought on by the COVID-19 pandemic in the first half of 2020 have started to subside. Following this trend was the recent announcement of the sale of Cincinnati, Ohio-based Queen City Hospice and its affiliate Miracle City Hospice to homecare firm Addus Homecare (NASDAQ: ADUS). Queen City Hospice was most recently backed by private equity firm Stonehenge Partners. The acquisition renders Ohio the second state in which Addus operates all three of its business lines, including personal care, home health and hospice.

Why Queen City Hospice Was Sold 

Queen City Hospice has 600 employees and serves an average of 900 daily patients across Dayton, Columbus, Cincinnati and other Ohio cities, with annualized revenues of about $56 million. The company was actively pursuing several growth initiatives up until its eventual sale, including geographic reach and diversified service lines. In September, Queen City expanded to Cleveland with the acquisition of Miracle City Hospice. Management hopes to continue this trajectory after the sale to Addus. “We look forward to working together to extend our market reach so that Queen City Hospice can provide quality hospice services to more patients,” Queen City Hospice CEO James Vannelle shares with Hospice News.

Why Addus Acquired

When Addus CEO Dirk Allison took the helm in 2016, he and his management team adopted a strategy to begin adding additional clinical services to states in which they had developed a strong personal care presence. The company saw success in building their home health and hospice businesses in New Mexico, the first state in which they offered all three of their service lines. “We wanted to replicate [New Mexico] in certain markets, with Ohio being one of the markets we had targeted. We already had a very strong personal care presence there, as well as a home health license that we could expand,” says Allison to Hospice News. “When Queen City decided they wanted to go through the process of selling, we were contacted by their investment banker. I think they knew of our desire to get further into hospice in certain markets, and it just made a lot of sense.” Acquisitions have historically been a large component of Addus’s growth strategy; the company has added approximately $82 million in acquired annualized revenues in 2020 over three deals, including the acquisition of Queen City Hospice.

How the Deal Went Down 

Addus’s team exercised caution in the early months of the COVID-19 pandemic, as the outbreak froze markets and impacted activity among industry participants. As the initial spike subsided and activity returned to home health and hospice services, the company began to reassess growth opportunities via acquisition across all of their operating segments, also referred to as the ‘three legs of the stool’. Addus purchased Queen City Hospice on November 11th for cash value of $192 million, $162.8 million of which accounted for enterprise value, with additional cash consideration of $29.2 million related to estimated tax benefits of the acquisition. The transaction was financed by a combination of cash on hand and Addus’s revolving credit line. Addus anticipates the transaction to be immediately accretive. The deal is expected to close in the fourth quarter of 2020, pending regulatory approvals and closing conditions.

What’s Next for Addus and Queen City Hospice 

Addus’s acquisition of Queen City Hospice sets the tone for coming years, as the company should continue to execute their roll-up strategy and expand their geographic presence in the home health and hospice industry. “We share the same dedication to patient-centered hospice services that allow consumers to receive quality, compassionate care in their homes,” says Addus CEO Dirk Allison of the two merging companies. “We believe this acquisition is a great strategic fit for Addus, and we look forward to the additional opportunities for growth through our combined operations.” In addition, Queen City Hospice has a newfound ability to scale, allowing them to further expand their operations.

What This Means for Middle Market Deals in the Sector 

In recent years, acquisitions have been a popular avenue for growth among major industry players. Companies have had an appetite for growth and service line diversification, but potential home health targets have been facing uncertainty due to the recent implementation of the Patient-Driven Groupings Model (“PDGM”) and its negative impact on cash flows. As a result, hospice providers have been a popular target, which is depicted by the astounding 3.4x revenue multiple applied to Queen City Hospice in their transaction with Addus. This trend will likely continue, as there is a finite amount of scalable acquisition opportunity in hospice and personal care, and major players are competing to take advantage of diversification and scale.

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