The Australian M&A Outlook: 2023 Health Industry Insights

Australia’s healthcare sector is not immune to challenging conditions – but opportunities exist, and the market is cautiously optimistic.

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Australia’s healthcare sector continues to grow, as does healthcare expenditure – both overall and as a proportion of gross domestic product. Opportunities exist for investors, with significant private investment required to meet the healthcare needs of Australians and achieve the desired level – and quality – of care coverage. Interest in the sector remains high. This interest, when coupled with record capital availability, gives plenty of reasons to feel positive about the future.

Overview

Our healthcare industry requires significant private investment to meet the expanding healthcare needs of Australians. Fortunately, there’s strong competition for deals in healthcare, coming from both local and international players as new and diverse pools of capital continue to look to invest in healthcare.

Over the past two-three years, despite the COVID-19-related disruptions, the sector has experienced an influx of capital. This has led to increased competition for deals and higher valuation multiples. Going forward, we anticipate some value realignment, just as we’ve seen in other sectors. Generally, though, we expect interest in healthcare to persist from traditional growth and buy-out private equity (PE), as well as long-term core plus capital.

Current conditions, however, require a disciplined approach from investors for the remainder of 2023. Players should carefully consider the timing and extent of the COVID-19 recovery and its impact on performance, alongside the broader (challenging) macroeconomic conditions and resulting impacts (e.g. inflation and staffing constraints). Furthermore, the post-COVID recovery and 'new normal', which differs by subsector and has been gradual in terms of activity levels, needs to be understood alongside the assessment of structural versus temporary operational impacts (especially around staffing supply and cost). These impacts have challenged margins within several healthcare operators.  

That’s not to say there won’t be plenty happening. Several PE funds have deep healthcare portfolios, with many opportunities expected to come to market in the next 12 months, which, alongside continued portfolio optimisation and strategic positioning within corporates, should provide a baseline of activity.

While the market has taken a measured approach in 1H2023, and we’ve seen mostly stable activity, green shoots suggest there’s reason to be more optimistic about deal activity in 2H2023 and into 2024.

Current landscape: Willingness to invest in healthcare

Last year, Australian health deal volumes were down slightly (116 deals completed in 2022, compared to 129 in 2021), while values dropped more substantially (US$1,855m in 2022, versus US$5,213m in 20211). With both values and volumes more aligned to pre-COVID levels.

Despite this recent stabilisation in deal flow over the last 6-12 months following record levels of activity, interest in healthcare M&A opportunities remains strong across both private and listed healthcare operators and investors. As such, whilst challenging economic conditions have hampered some dealmaking during the first half of the year, we expect positive momentum over the next 12 months.

Interestingly, activity has been strong from both a listed-transaction perspective and a private perspective. (That is, there has been sustained interest from PE and corporates, as well as deal flow at the listed level, with listed companies doing deals themselves and being targeted for take-privates.) 

Overall, we’ve seen a willingness to invest in health, and that’s set to continue.

The diagnosis? The healthcare sector offers plenty of opportunities to create value, and cautious optimism prevails.

Market outlook: Continued complexity in the wake of COVID, but long-term conviction remains

Healthcare is a sector where private investment remains pivotal to providing solutions to the sector's challenges and expanding needs. Despite the short to medium-term impacts of COVID-19 and broader macroeconomic challenges, strong market fundamentals will continue to drive demand for healthcare services in Australia, underpinning the sector as an attractive area for investment. 

Investors face complex questions when assessing current healthcare opportunities. And yet we’ve seen continued long-term conviction in the sector, and we expect this to prevail. 

This conviction is underscored by a number of tailwinds, including:

 
  • healthcare expenditure increasing as a proportion of GDP

  • a growing and aging population and the associated rising incidence of chronic conditions

  • rising chronic disease burden, resulting in increasing health costs. Here, limited public financing options are shaping commercial opportunities for private healthcare providers.

  • a commitment to improve healthcare coverage across the breadth of the country, alongside other funding and regulatory initiatives. (For example, increased funding through the Pharmaceutical Benefits Scheme (PBS), aged care reform, investment in mental health, and investment in women's health.)

Other factors to be considered include the federal budget measures to improve the affordability and sustainability of healthcare, including increased funding for the Medicare Benefits Schedule (MBS), the PBS and Home Care Packages, as well as subsidies for aged care and primary care services.

In terms of major trends, we continue to see:

  • portfolio optimisation via divestitures and carve-outs alongside redeployment of capital (focusing on timely decision-making, actively embracing divestitures, and navigation of inertial factors like entanglements) 
  • significant opportunities for value creation, including via portfolio M&A with many healthcare subsectors fragmented and ready for consolidation 
  • opportunities for longer-term capital, underpinned by structural demand factors and defensive growth characteristics
  • opportunities associated with the rise in consumerism in healthcare along with advancements in health technology and alternative care models
  • continued complexity in the wake of COVID-19 impacting the assessment of value and debt financing considerations. This includes complexity around the timing and extent of the pandemic recovery, at both an activity level (including patient pathway disruption) and within operating efficiency/margins. It’s important to note, this trend and outlook differs on a sub-sector and business by business level.

Green shoots suggest there’s reason to be optimistic about deal activity in 2H2023 and into 2024.



Next steps for dealmakers

Value creation is key

To drive deals in 2H2023, dealmakers should consider these four trends:

  1. Value alignment and buying opportunities: After a period of record valuations, and a period of expanding bid-ask spread (i.e. the gap between ask price and bid price) we expect broader market conditions to support better alignment on value  
  2. Flexibility is a must, including potential alternate structuring: Further to the above, dealmakers are thinking afresh about deal structure and alternative structuring (think: minorities, co-investing, and deferred consideration) as a potential way to align objectives and unlock opportunities
  3. Generally, however, the key focus for bidders needs to be on applying a value creation lens to transactions. Business improvement is essential, so consider: How can we improve the asset, its operational efficiency, and strategic positioning? Where can we invest to drive growth? How can we invest? And how can we position a business to be at the forefront of a changing health system?
  4. Increased complexity: This includes greater complexity around finance, operational and tax issues, as well as broader market factors seen at both a macro level (including regulatory, funding, and supply and demand factors amongst others at both a state and national leveland localised market factors (i.e. variations to be assessed by local catchment and site by site).

 

Explore our national findings plus other industry insights as part of this series

 

Contact us
 

Ben Pearce
Health Deals Leader

Anna Lorigan
Health Deals Director

Fraser McTavish
Health Deals Director




 Source
1 Source: Refinitiv and PwC analysis: We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv as of 31 December 2022 and as accessed on 2 January 2023. This has been supplemented by additional information from Dealogic, Preqin, S&P Capital IQ and our independent research and analysis. This publication includes data derived from data provided under license by Dealogic. Dealogic retains and reserves all rights in such licensed data. Certain adjustments have been made to the source information to align with PwC’s industry mapping.

 Disclaimer

About the data

We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv as of 31 December 2022 and as accessed on 2 January 2023. This has been supplemented by additional information from Dealogic, Preqin, S&P Capital IQ and our independent research and analysis. This publication includes data derived from data provided under license by Dealogic. Dealogic retains and reserves all rights in such licensed data. Certain adjustments have been made to the source information to align with PwC’s industry mapping.