Buy-and-build a

Rachel Lewis
18 January 2022

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Many European countries still have highly fragmented outpatient healthcare service sectors that could be a boon for sponsors looking at consolidation plays, according to a McDermott Will & Emery (MWE) and EY panel at this year's JP Morgan Healthcare conference.

"If you look at the outpatient sector, little clinics are being bought by investors," said MWE partner Stephan Rau. "I think this is an advantage for funds in Germany as opposed to the US market, but it's also true of several other European markets that are highly fragmented."

Clinical laboratories – performing tests ranging from routine blood panels to Covid-19 PCRs – are considered the most consolidated sector, but even there the largest players have a 10% market share in Germany, panellists argued.

"Dermatology, ophthalmology, diagnostic imaging, all of these markets are highly fragmented. If you follow a viable strategy, I think a healthcare services play in Europe is the ideal case," Rau added.

Most of the GPs already embarking on these buy-and-build strategies are doing so with anchor strategic assets. "Trade players are being the dominant party across lots of transactions," said Tony Drabble, the health and life sciences sector lead at EY.

For example, pan-European ophthalmology group Veonet, recently acquired by PAI Partners and Ontario Teachers, was built through the consolidation of Ober Scharrer Group in Germany (from Palamon), SpaMedica in the UK (from CBPE), and Eyescan in the Netherlands.

Other funds are consolidating at the single-practice level. For example, Telemos Capital-backed MedEuropa is buying up single radiotherapy practices across France and Germany, and Gimv recently upped its stake in GPNZ, a German dentistry group that consolidated nine practices in 15 months.

One big driver behind consolidation is the emergence of industrialisation and technology, said Marco Bonaiti, vice-president at Apax Partners, which recently sold Europe's second largest diagnostics company, Unilabs, to AP Moller in a EUR 4bn+ deal.

Being able to ship samples to a central lab enables a buy-and-build strategy. "I think now the reason we're seeing consolidation improving in other sectors, like imaging and pathology, is the role that technology has played," said Bonaiti. "With the advent of teleradiology and histopathology, you really see why scale brings some of the synergies that weren't available 20 years ago."

Private equity is, however, increasingly facing competition from infrastructure funds, family offices and institutional investors.

"I think we've seen a number of new buyers emerging for some of these assets, many of which are quite sizeable," said Henry Elphick, deputy chair of the European Healthcare Private Equity Association. "Unilabs sold to a very unexpected buyer, which had never made a significant investment in anything to do with healthcare before. We've still got the unexpected buyer in the pack and they're looking at all sectors."

The panel also pointed to Mubadala, the Abu-Dhabi sovereign wealth fund, buying special needs school provider Witherslack, and new fund Adagia Partners buying Schwind, which provides specialist lasers for eye surgery, as examples.