Acadia Healthcare to issue debt funding Priory transaction but will keep leverage under 5.5 times

By Paul Deckelman

New York, Jan. 14 – Acadia Healthcare Co., Inc. said it will soon be visiting the debt markets to help fund its recently announced cash and stock transaction to acquire Britain-based Priory Group.

At the same time, its chairman and chief executive officer said Thursday that the Franklin, Tenn.-based top U.S. provider of in-patient behavioral health care services will “make sure that we stay under 5.5 times leverage.”

CEO Joey A. Jacobs told participants at the J.P. Morgan Healthcare Conference in San Francisco that “we’ve always had in our strategy that we be between 4.5 [times trailing 12-month adjusted EBITDA] and 5.5 – closer to 5.5 when we make large transactions.”

Priory deal enlarges company

Acadia, which currently operates some 258 psychiatric hospitals, mental health treatment and substance abuse rehabilitation centers and other, similar facilities in 39 states, Puerto Rico and in the United Kingdom, with a total of 9,900 in-patient beds, will more than double the size of its operations to 580 facilities with almost 18,000 in-patient beds with the acquisition of Priory.

Annualized revenue for the combined company is expected to come in at over $2.8 billion on a pro forma basis, versus Acadia’s $1.9 billion as of the 2015 third quarter, with adjusted EBITDA likewise seen growing to an estimated $667 million from $451 million.

The Priory transaction, which was announced on Jan. 4 and which is expected to close next month, is valued at about $2.2 billion total. Acadia will issue Priory’s current owners an aggregate of 5.363 million shares of Acadia common stock worth an estimated $346 million, subject to adjustment, and will pay cash consideration of some £1.275 billion, or approximately $1.887 billion.

The cash component will include about £925 million, or around $1.369 billion, that will be used to repay Priory’s outstanding debt.

Acadia will seek a combination of equity and long-term debt to finance the transaction. Last week, it did an underwritten public offering of 10 million common shares at a price of $61.00 per share, generating gross proceeds to the company of $610 million before the underwriting discount and offering expenses.

Total proceeds from the stock offering are expected to grow once the underwriters exercise their over-allotment option to purchase up to an additional 1.5 million shares at the public offering price less the underwriting discount.

Debt to fund Priory purchase

Acadia has also received a commitment from Bank of America Merrill Lynch and Jefferies Finance LLC regarding the debt financing for a portion of the cash payable in the transaction.

According to the slides the company prepared for use during the conference presentations by Jacobs and Acadia’s president, W. Brent Turner, Acadia had some $1.023 billion of secured debt as of the end of the 2015 third quarter on Sept. 30, mainly it $505.9 million outstanding under its term loan A tranche due in 2019 and $494 million of existing term loan B debt due in 2022.

The company’s total debt at Sept. 30 stood at $2.134 billion, including amounts outstanding under four series of junk bonds – $9.1 million of 12 7/8% senior notes due 2018, $150 million of 6 1/8% senior notes due 2021, $300 million of 5 1/8% senior notes due 2022 and $651.4 million of 5 5/8% senior notes due 2023.

During 2015, the company did several sizable acquisitions and a number of smaller tuck-in acquisitions that boosted its facilities count to 258 at the end of the year from 78 at the end of 2014, increasing its in-patient beds to 9,900 from 5,800. Several of the transactions were scheduled to close during the 2015 fourth quarter ended Dec. 31, with the company slated to finance those transactions by drawing $158 million from its $300 million senior secured revolving credit line due 2019. In November, Acadia also redeemed the last $9.1 million of the 12 7/8% notes.

Those two transaction brought year-end secured debt to an estimated $1.181 billion and total debt to an estimated $2.283 billion.

Pro forma for those transactions, including acquisitions closing in the fourth quarter, the company’s annualized adjusted EBITDA would be $450.9 million and cash and equivalents $14.8 million, producing a pro forma year-end leverage ratio of secured debt as a multiple of adjusted EBITDA of 2.6 times and pro forma leverage of total net debt to adjusted EBITDA of 5 times.

Debt, leverage rises

According to the figures contained in the slides, the company expects to incur $955 million of new term loan B debt with a seven-year tenor and $390 million of new senior notes with an eight-year tenor in connection with the Priory acquisition.

That would boost its secured debt figure to an estimated $2.137 billion and total debt to an estimated $3.628 billion.

On the EBITDA side, the Priory transaction is expected to add $215.7 million to Acadia’s own year-end EBITDA, bringing that earnings measure to $666.5 million on a pro forma basis.

That would result in a pro forma secured leverage ratio of 3.2 times and a pro forma total net debt leverage ratio of 5.4 times, falling within the company’s previously announced parameters.

CEO Jacobs told the conference-goers that “we’re going to be generating a ton of cash from this combined company.”

The Priory deal, he said, “is very accretive to us – it grows our revenue, grows our EBITDA, diversifies the company.”

During his formal presentation at the conference, Acadia president Turner said that the acquisitive company is “constantly adding beds to our portfolio,” to help meet future demand.

He explained that “when we do this, when we’re able to put more patient days and treat more patients, [and] deliver care in those markets. Because of the cost structure of these facilities and the incremental margins, our overall margins show enhancements.

“The benefit of that,” he continued, “is that it creates more and more free cash flow for the company that we can reinvest in our business or pay down debt and drive positive earnings growth.”

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