Deal-making and consolidation

Christopher Jobst, director of healthcare corporate finance at Alantra, explains why German healthcare services remain attractive to private equity investors and that investment and consolidation opportunities will continue to emerge

The German healthcare market still has huge potential for deal-making and consolidation, while concurrently being subject to government scrutiny through regulatory interventions.

The latter is nothing new. Ever since Chancellor Otto von Bismarck in 1883 obligated companies to provide its employees with health insurance under the Sickness Insurance Act, a scheme into which both parties paid, Germany has been one of many European countries to provide universal coverage through a mixture of private and publicly-funded providers.

This provision of universal healthcare is coupled with an appetite to promote commercial competition which attracts private equity firms and strategic acquirers looking to capitalise on Germany’s openness and hunger for innovation.

The most buoyant sectors within healthcare for investors interested in Germany are nursing homes, outpatient intensive care, dental services and some other nascent sub sectors. Healthcare services is one of the most exciting sub sectors in Germany.

Between 2016 and 2019 there were 103 German healthcare deals, according to Mergermarket. It is evidently a highly attractive market for buyers.

Nursing homes have particular appeal and have been a target for M&A for a decade. Compared to Italy, Spain and France, Germany is rich in greenfield projects, primarily initiated by real estate developers. Further, Germany is still a highly fragmented market, with the top 10 private players only representing around a 15% market share.

Meanwhile, privately held companies are also prospective targets for M&A. This potential for further consolidation is attractive to private equity and strategic players alike.

The regulatory and funding environment means that it is easier to build nursing homes in Germany than in other markets in Europe. Compare this with France’s more M&A-heavy market where new builds are rarer because of its freeze on licences for new homes and single-payer model. And also with Spain, where extensive M&A consolidation has already taken place. On the other hand, the potential returns in Germany are more appealing.

This will continue to be the case in the coming years.

At Alantra, we’ve completed 16 deals in the European nursing home market in the last three years alone. We think this trend is set to continue.

Despite the opportunities, there are some challenges for buyers and sellers of nursing homes. Furthermore, there is ongoing political discussion and new regulations which will impact the freedom of private and public players. For example, the availability of qualified nursing staff is a huge factor when it comes to considering a nursing home business and its P&L for a private operator.

AND 2019

Jens Spahn, federal minister for health, is currently looking to introduce a significant reform to increase staff ratios overall, particularly in hospitals and nursing homes. He is also considering an overhaul of nurses’ pay as well as other, tangible regulations that may have an impact on the sector.

On the commercial side, the key players in the German nursing home market – Alloheim, a German healthcare operator, and Korian and Orpea, French healthcare companies – and their buying behaviour indicate potential growth.

Alloheim is the largest consolidator of the market. It started investing in 2008 when it operated only 13 homes, and since then has been sold to Carlyle and then to Nordic Capital; today, Alloheim operates more than 200 nursing homes and is pursuing both M&A and greenfield projects.

For French players such as Korian and Orpea, greenfield projects in Germany are really appealing, given the lack of investment options in their home market. When it comes to M&A, there are currently 15 to 20 smaller nursing home groups operating independently which potentially will come to market in the coming years.

A key trend in Germany is that real estate investors are funding and executing new build projects. DOREA, established in 2015, recently disclosed that it has 10 new build projects in its pipeline, to be developed and executed by IMMAC and Aureus, which will be up and running by the end of 2021. Alantra’s team has worked with the firm; we recently completed a deal for DOREA, which has a dedicated buy-and-build strategy and has achieved more than 30 acquisitions since 2015.

The company operates almost 70 nursing care facilities with around 6,500 beds and provides outpatient care services to about 1,200 senior citizens. The group has stationary and ambulatory care as well as specialised care services, which shows the breadth of its offering. The deal follows the trend of interest from French buyers with Maisons de Famille acquiring the group.

Another sub sector to watch is the outpatient intensive care market which has shown strong M&A momentum in the last three years with the platform companies DFG, Linimed, Opseo and Bonitas all acquired by private equity firms.

While the market is highly fragmented, however, it is important to note that add on deals are much smaller compared to the nursing home sector and that staff numbers play a crucial role in the sector.

Alantra recently completed a deal involving Bonitas, a leading German inpatient and outpatient care services provider. The company specialises in intensive care treatments and holistic non-intensive service offerings for both adults and children to help patients facilitate their autonomy and outpatient care in specially equipped community care homes.

Bonitas was acquired by Advent International with Alantra as the buy-side advisor. Advent also acquired DFG from Chequers. Combined with Bonitas, they created the leading outpatient intensive care provider in Germany.

We expect that the segment will see further consolidation, however, ultimately, only three to four platforms will dominate the market. In addition to private equity firms which have already invested, strategic players such as Alloheim, Air Liquide and Korian are also considering the segment.

Dental services are receiving a lot of attention in Germany with almost 15 private equity firms investing in dental clinics since 2015. The market is worth around €30bn (US$33.3bn) and under consolidation; only 1-2% is currently owned by private equity-backed groups. The pace, however, will be slowed by the regulatory environment.

To date, practitioners have been concerned about the impact on quality-of-care, fearing that cities will end up with a concentration of larger players and that rural areas will experience job losses and a lack of services. Germany’s Association of Dentists lobbied against consolidation in an effort to protect the status quo; new regulations were implemented in May this year.

Private equity has, since then, been able to acquire but the pace is slow and the process requires in-depth analysis; there are caps on market share for acquirers in certain districts. When these businesses come to market in three to five years time, we expect that exit multiples will not be as large as before.


That is because future, inorganic growth for new buyers is limited, which will be reflected in the acquisition price.

Strategy becomes central here; buyers will have to ensure their add-on pipeline is full so that they can still achieve a good return by acquiring smaller clinics for EBITDA multiples below ten times and by realising multiple arbitrage in the exit.

There is further investment potential in other healthcare services such as cardiology and dermatology, however, consolidation hasn’t really started in those sub sectors yet.

At the moment the strategy in those areas is to buy and build but as those businesses evolve, they will become attractive to private equity. Again, while the pace of M&A will be slow, the potential is certainly there.

Overall, the last three years have seen a large number of mid-market deals in healthcare services in Europe. Transaction multiples have been around 12-14 times EBITDA; in dental and vet clinics even higher at around 15 or above. The pace of mid-market healthcare services deals will be slower in the short term, given that most of the assets which have traded in the last two to three years are not yet ready for exit.

While there is still appetite, however, assets were sold on partially highly adjusted EBITDAs and, after one to two years of ownership buyers and financing, banks have realised that some of the adjustments aren’t materialising.

That means more caution when new assets are considered.

Despite the unpredictable regulatory outlook, investors are attracted to the broad investment horizon in German healthcare services.

Private equity investment supports organic growth (new builds), digitalisation, development of clinical management, knowledge around evolutions in care, and increased quality of and investments into technology.

It is a buoyant industry in which well versed players know that regulation may impact their business; something German healthcare has been managing for over 100 years since Bismarck.

A number of attractive assets will come to the market in the coming years. But competition is stiff, and the business environment favours the experienced investor with a track record in the market.