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Acadia Healthcare (ACHC) to Sell UK Unit to Focus on US Business

Zacks Equity Research
·4 min read

Acadia Healthcare Company, Inc. ACHC has entered into a definitive agreement to sell its U.K. operations to Waterland Private Equity.

The deal is likely to generate $1.35 billion. The sale is expected to close in January 2021. The transaction includes divestment of the whole of Acadia Healthcare’s U.K. business operations, which are operated under the name of The Priory Group (the Priory Business).

Further, this business streamlining will aid the company’s growth by enabling it to focus on its core business of mental health and substance use treatment across the United States. The company will continue to focus on delivering optimal level of patient care and advance its position as a leading behavioral healthcare facilities operator in the country. Also, expansion of beds at its existing facilities as well as at the new centers will contribute to growth. During the first nine months of 2020, the company added 206 beds to its U.S. operations and expects to add nearly 100 beds in the fourth quarter.

In the U.K., the company operates 361 behavioral healthcare facilities with nearly 8,700 beds across England, Wales, Scotland and Northern Ireland.
This behavioral healthcare company is under pressure with regard to its U.K. operations, which is suffering low census and a tightening labor market for nurses and other clinical staff. This, in turn, weighed on its top line and escalated costs.

The sale of U.K. operations will remove a significant overhang from the company. This business has been underperforming from the past many years and dragging the company’s growth. As of September 2020 end, revenues and EBITDA declined 0.3% and 12%, respectively.

Operating costs in the company’s U.K. segment were significantly higher, primarily due to the ongoing nursing and clinical staff shortage and dependence on higher cost agency labor. The census in the company’s existing healthcare business declined as it experienced a decrease in referrals from the National Health Service NHS. Similar to industry trends, the company continues to experience difficulty in recruiting nurses and clinical staff, which requires it to utilize agency labor to fill in those positions.     

As the company’s census did not reach a sufficient level to absorb the higher wages and bear other operating costs, its margins and earnings are dwindling.

Another niggling factor is the company’s elevated debt load, which induces risk related to high financial leverage. Presently, its total debt is 119.6% of its total equity. The company will use the proceeds generated from the aforementioned divestiture for debt repayment.

Notably, COVID-19 global pandemic has so far left a profound impact on the mental health of individuals. The ongoing economic uncertainties and societal concerns continue to spur demand for the company’s services, especially for those already struggling with behavioral health and addiction issues. The pandemic only intensified the woes with pangs of isolation and anxiety.

Notably, during the third quarter, the company experienced a strong top line with revenues rising 7.2% from the prior-year quarter’s reading, reflecting robust demand for its behavioral health services.
The company is also using telehealth capabilities, wellness checks and crisis hotline to reach out to its patients.

Additionally, Acadia Healthcare is noticing measurable improvement in its cost-management efforts and operating efficiencies that were implemented in both 2019 and 2020. The company recognized $4.6 million worth of savings in the third quarter relating to the 2019 cost-saving initiatives. It is also on track to achieve a run rate of $20 million by this year-end.

The stock has skyrocketed 97.33% in the past six months compared with the industry’s growth of 64.22%.

Other stocks in the same space like including Community Health Systems, Inc. CYH and HCA Healthcare, Inc. HCA have also soared 145.5% and 67.3%, respectively, while Avita Medical Ltd. RCEL has lost 37.9% over the same frame.

Acadia Healthcare currently carries a Zack Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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