M&A in the healthcare sector
The healthcare market is an important sector of the German economy. It is also a growth market. The number of transactions taking place in the German healthcare market – particularly the in-patient care segment – has increased exponentially in recent years.
Mergers and acquisitions of companies in the healthcare sector make the cost reductions that individual market players desperately need to remain competitive possible.
At the moment, the healthcare market is a very attractive market for private investors. It is characterised by municipal hospitals with budget deficits that are in urgent need of investments, and municipal authorities that are no longer covering the hospitals’ losses.
The geriatric care market is also of interest to investors due to its above-average growth rate. This growth is being driven by the population’s longer life expectancy, which means that elderly citizens are increasingly being cared for in old people’s homes and nursing facilities rather than in their own homes.
M&A transactions in the healthcare sector
M&A targets in the healthcare sector are companies providing or offering (medical or non-medical) services or products (pharmaceuticals, medical devices and medical aids) for health care purposes. To be more exact, healthcare companies offer (medical or non-medical) services. Life sciences companies, on the other hand, offer health-oriented products such as pharmaceuticals or medical devices.
Another prerequisite for potential M&A targets in the healthcare sector is that the company is capable of incorporation and third-party ownership. Businesses such as pharmacies are not suitable for M&A transactions because the German Pharmacy Act prohibits third-party ownership as the subject-matter of a transaction (with the exception of asset deals between two licensed dispensaries). There are also certain restrictions on investments in the ambulatory medical care segment due to the fact that both physicians and pharmacists are classified as ‘freelance occupations’.
The German healthcare market is governed by various regulatory instruments which can have an impact on M&A transactions. Social security law is particularly important because it dictates the circumstances under which businesses in the healthcare sector can provide and bill services to the statutory social insurance providers (particularly the statutory health insurance providers). As a result, M&A transactions in the healthcare sector should be accompanied by both corporate law and medical law experts.
The sale of a medical practice is often associated with the following special circumstances:
- Since the physicians themselves are often the ‘locomotive’ driving the business, it is important to secure a long-term commitment from them in the form of employment contracts.
- The purchase price generally reflects the earnings or profits that the physicians will make at the medical practice after its sale and, for that reason, many contracts include earn-out provisions.
- The physicians on the selling side of the transaction are usually hoping for an appropriate sum of money for their retirement, which is why tax optimisations play an important role.
Transaction models: share deal vs. asset deal
The participation or transaction model that is chosen for the deal depends on the objective. In addition to the options available under transformation law, the private investor will primarily consider whether to purchase shares or assets.
In a share deal the company’s shares are purchased by and transferred to the investor. Unlike an asset deal, the target retains its legal identity and existing supply contracts are still effective after the transaction.
Share deals are also associated with tax benefits. For example, section 1, paragraph 3 of the German Real Estate Transfer Tax Act (GrEStG) stipulates that no real estate transfer tax is payable if less than 95% of the shares in the company that owns the real estate are acquired and the transaction structure is otherwise diligently designed. On the other hand, an in-depth enterprise valuation is necessary in a share deal because all of the company’s liabilities are transferred to the investor.
If the investor chooses to go the way of the asset deal and acquire the company’s entire assets (particularly its real estate), and the healthcare institution’s liabilities, rather than its shares, the situation is somewhat different. An asset deal is associated with a change of operator, which means new supply contracts have to be entered into. There are also stringent requirements to be met with regard to the definition of the assets to be transferred to ensure adherence to the principle of certainty under property and land-register law.
Orth Kluth has already advised clients on the sale medical practices and clinics with various specialisations (particularly nephrology and ophthalmology), whereby many of the transactions also involved a re-investment by the seller. Orth Kluth has also supported private equity companies in the medical practice acquisition process.
Orth Kluth collaborates with competent and dependable partners who have the necessary medical law expertise to support healthcare sector transactions.