Surgery Partners has recently been buzzing over the internet after a Bloomberg report suggesting that the healthcare services company is considering strategic options, which may include a possible sale. According to insiders, the company has engaged a financial adviser to evaluate the buyout interest, although the details remain confidential. With Bain Capital, a major buyout firm holding a 39% stake in Surgery Partners, the company presents an interesting proposition for strategic buyers or other private equity firms. Let us examine Surgery Partners and take a closer look at the biggest recent developments that could make the company an attractive acquisition target for strategic buyers as well as private equity sponsors.
What do Surgery Partners do?
Surgery Partners, Inc., along with its subsidiaries, owns and operates a comprehensive network of surgical facilities and ancillary services across the United States. The company specializes in providing ambulatory surgery centers and surgical hospitals that offer a wide range of non-emergency surgical procedures, including orthopedics and pain management, ophthalmology, gastroenterology, and general surgery. Additionally, Surgery Partners provides an array of diagnostic imaging, laboratory, obstetrics, oncology, pharmacy, physical therapy, and wound care services. Its ancillary services include multi-specialty physician practices, urgent care facilities, and anesthesia services, catering to both single- and multi-specialty needs.
Expansion of High Acuity Procedures
One of the key drivers for Surgery Partners' stock in the coming years is the company's strategic focus on expanding high-acuity procedures. In the latest earnings call, it was reported that total joint replacements increased by an impressive 54% over the first quarter of 2023. The company's attempts to increase its skills in high-demand surgeries like complete shoulder replacements, which were recently taken off the inpatient-only list, and to attract specialized orthopedic physicians are largely responsible for this rise. The company's same-facility net revenue grew by 10.2% in the first quarter, driven by a combination of case volume and net revenue per case growth, with higher acuity procedures playing a significant role. Additionally, the musculoskeletal (MSK) segment saw substantial growth, with over 61,000 MSK-related procedures performed in Q1 2024, representing a 14% increase over the prior-year quarter. This focus on high-acuity procedures not only enhances patient outcomes but also contributes to higher revenue per case, thus improving overall profitability. As the company continues to build on this momentum, the consistent addition of high-value procedures will likely drive sustained revenue growth and position Surgery Partners as a leader in the surgical care market.
Strategic Acquisitions and Capital Deployment
Another critical driver for Surgery Partners' future performance is its disciplined approach to strategic acquisitions and capital deployment. The company has maintained a robust pipeline of acquisition opportunities, closing several significant deals in the second quarter of 2024. This includes a $60 million transaction completed in early January and additional acquisitions totaling between $200 million to $250 million, which were finalized on April 30. These acquisitions primarily focus on MSK procedures and are expected to enhance the company's multi-specialty capacity. Surgery Partners' approach involves acquiring facilities at attractive multiples, integrating them efficiently, and leveraging synergies to drive earnings growth. The company has a track record of successfully locating and carrying out smart acquisitions that support its expansion goals. This is reflected in the company's updated guidance, which anticipates full-year net revenue of at least $3.05 billion and adjusted EBITDA of at least $505 million. These acquisitions not only expand the company's footprint but also provide significant opportunities for revenue and margin expansion, making strategic capital deployment a vital component of Surgery Partners' growth strategy.
Operational Efficiency and Margin Expansion
Operational efficiency and margin expansion are pivotal to Surgery Partners' growth strategy and stock performance. In the first quarter of 2024, the company reported an adjusted EBITDA of $97.5 million, representing an 8.2% increase over the prior-year quarter, with EBITDA margins improving by 10 basis points to 13.6%. This improvement is attributed to ongoing initiatives in procurement, revenue cycle management, and the realization of synergies from recent acquisitions. The company's efforts to enhance operational efficiency are further supported by a robust physician recruitment strategy, which added over 200 physicians in Q1 2024. These recruits have a revenue per case 25% higher than the previous year, driving both volume and revenue growth. Additionally, Surgery Partners' focus on higher acuity procedures has contributed to a 90% compound annual growth rate in total joint cases since 2019. The company also anticipates further margin improvement as inflationary pressures abate and operational initiatives continue to bear fruit. With a clear strategy to drive operational efficiency and expand margins, Surgery Partners is well-positioned to achieve its long-term financial goals and deliver value to its shareholders.
Final thoughts
Source: Yahoo Finance
As we can see in the above chart, the speculative buzz did result in a spike in Surgery Partners’ stock price and it came at a time when Surgery Partners had seen its value decline by roughly 33% this year. Operating a network of surgical facilities across the United States, Surgery Partners has demonstrated resilience and potential for growth and its valuation is also not too pricey. The company is trading at an LTM EV/ Revenue multiple of 2.88x and an LTM EV/ EBITDA multiple of 14.53x which means that there could be a decent acquisition premium on the table. Despite these promising developments, it is important to note that discussions are still in the early stages, and there is no certainty that a deal will be finalized. Neither Surgery Partners nor Bain Capital has provided comments on the matter. Hence, it is important for investors to have a wait-and-watch approach towards the stock of Surgery Partners.
