Below, Andrew Colbert, senior managing director at Ziegler Corporate Finance Healthcare Practice, sits down with AXIS Imaging News to discuss the ins and outs of radiology group consolidation and what this may mean for imaging practices now and in the future.
AXIS Imaging News: What have you seen over the last couple of years in terms of radiology group consolidation?
Andrew Colbert: We are seeing record levels of mergers and acquisitions (M&A) activity in the radiology space with no sign of slowing down. The largest platforms in aggregate only cover about 15% of the market, so there is tremendous opportunity for continued consolidation. To better illustrate this level of activity, at Ziegler we advised seven radiology M&A transaction in 2021, which is record-setting for our firm.
AXIS: What is your sense of how that might continue/not continue into 2022 and in the foreseeable future?
Colbert: We saw a number of new private equity groups enter the radiology market in 2021—for instance, American Securities backing Simonmed and Cranemere buying Outpatient Imaging Associates. As more buyers/investors enter the sector, it will only continue to fuel demand for high-quality radiology platforms.
AXIS: What factors are driving these trends?
Colbert: Radiology group owners are facing increasing complexity in managing their business operations—unprecedented labor shortages and wage increases, reimbursement and regulatory challenges, and increasing consumerization of healthcare. Even the most accomplished groups are realizing that the status quo is not sustainable, and they must be more strategic regarding their growth investments.
Private Equity is attracted to the opportunity to take advantage of the migration of volumes from higher-cost hospital settings to lower-cost outpatient sites. Radiology is well positioned to benefit from this shift in consumer preferences as well as driving higher quality and lower cost. In addition, private equity can bring economies of scale and best practices on how to make growth investments.
AXIS: What are the most important factors behind radiology group valuations?
Colbert: Valuations are highly nuanced, but revenue growth and EBITDA margins are typically the largest drivers of valuation. Additional areas of focus include caliber of the management team, track record of organic growth, quality of the clinical team, diversification of the revenue mix, local market reputation, patient/referring physician satisfaction, and the outpatient footprint.
Investors are also keenly focused on capital equipment and IT capabilities as these are both areas that can require significant capital investment if not properly maintained. It’s interesting that cybersecurity is becoming an increasing area of focus for investors as healthcare companies are becoming larger targets for potential attacks.
AXIS: You mentioned infrastructure or the valuation factors before the revenue numbers are considered. Can you please elaborate on that?
Colbert: Investors look for companies with professionalized management and operational systems that are built to scale. If the infrastructure is outdated and the systems need replacing, then the investor will lower the upfront valuation to consider the investments that they will need to make going forward. Companies that are making proactive investments in IT systems and capabilities will be valued at a premium.
AXIS: Then there are the numbers such as revenue, market size, potential, and other factors which are complex and require real expertise to sort out. Please give us a run down on what is considered in this regard.
Colbert: The most important factor in driving valuation is revenue growth and earnings margin. Not all revenue is created equal, so it’s important that the growth is coming from profitable business and is diversified across many customer accounts. From a market perspective, it’s ideal to have a diversified geographic footprint that serves multiple geographies and a proven track record of expanding into new markets. It’s also helpful to have demonstrated a successful M&A integration strategy. Investors look for companies with strong brand recognition and a management team with a well-defined business plan to attack the market opportunity.