Top 5 Deal Opportunities in the Southeast

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1 May May 2013 Top 5 Deal Opportunities in the Southeast By Natalie Everett The Southeast s aging population and interest in wellness will benefit several industries and provide deal opportunities for investment banks Industries that focus on improving quality of life will provide deal opportunities in the Southeast Investment banks are likely to find some of the most robust deal opportunities in the Southeast in industries that cater to improving the quality of life of people in the region, particularly in the healthcare sector, over the next five years. This is because the region s population skews older, and as people age they tend to have more health problems. Further, the nation s growing interest in wellness as a lifestyle for both people and their pets will make for strong growth in industries that cater to health and wellness. Thanks to the federal Patient Protection and Affordable Care Act of 2010 and technological advancements, healthcare is expected to be the most prominent fast-growing sector of the economy in the Southeast. From its database of more than 1,000 industries, IBISWorld has identified five growing industries that are expected to seek investment banks for capital raising and corporate M&A services, particularly in the Southeast. The five identified industries have low structural risks, high profit margins, strong growth or high M&A activities, all of which provide deal opportunities for investment banks. Structural risk measures the impact of competition, entry barriers, government assistance, volatility and other fundamental characteristics affecting all industries. Industries with low structural risk and high profit margins present favorable acquisition targets, which increases demand for M&A services provided by investment banks. Growing Industry Performance Industry Annualized Growth ( ) Profit Margin Structural Risk* Blood and Organ Banks 6.3% 8.0% 2.91 Veterinary Services 3.9% 10.0% 2.39 Gym, Health and Fitness Clubs 2.8% 8.4% 4.10 Elderly and Disabled Services 7.7% 5.6% 3.17 Trade and Technical Schools 2.7% 8.9% 2.50 * Measured on a scale from to 9.0 from lowest to highest risk SOURCE: info@ibisworld.com

2 May firms seek out investment banks to raise capital and further expand their business. On the other hand, firms operating in consolidating industries will require business valuation, M&A advisory and restructuring services provided by investment banks. Blood and Organ Banks Demand in the Blood and Organ Banks industry is forecast to rise in line with the aging population, which has a higher proportion of medical needs. Industry revenue is expected to grow an annualized 6.3% in the five years to 2018, partly aided by the Affordable Care Act. Projected revenue growth represents wealth management and corporate finance opportunities for organizations like investment banks. Industry growth will be especially strong in the Southeast, given its high elderly population. Already, in 2013, 31.7% of industry establishments are located in the Southeast. There are currently not enough donated organs to accommodate demand. Developments in genetic research, stem cell research and regenerative medicine are expected to increase the importance of biobanking in research and in meeting organ demand. For example, tissue engineers and stem cell researchers are developing ways of growing organs. If successful, they would require organ banking for the duration of time between an organ s production and the time it is used. The introduction of such new technologies will lead to increased M&A activity as larger blood and organ banks look to buy smaller, specialized ones. Well-positioned investment banks can begin developing relationships with blood and organ bank operators and assist with financing and M&A deal optimization, perhaps by leveraging public or private equity securities. Blood and Organ Banks Highly profitable operating segments within the industry include plasma collection centers and cord blood banks, which store umbilical cord blood for future use. Cord blood banks have high fixed operating costs, so as more people pay for storage services, per unit costs decline, resulting in higher profit margins. Although the industry is almost evenly split between nonprofit and for-profit firms, IBISWorld estimates that average industry profit is still 8.0%. Average operating profit for the industry as a whole is expected to increase slightly in the next five years as demand booms and companies restructure to accommodate rising regulatory costs. Investment banks can step in to provide financial advisory services to cord blood banks and plasma collection centers in particular, in anticipation of M&A activity on the horizon. This industry is growing fast, with revenue forecast to rise 4.5% in 2013 and

3 May then surge 10.2% after an insurance exchange is established as part of healthcare reform that will become effective in The health insurance exchange will alleviate some problems associated with access to healthcare. Greater access will increase industry revenue. This favorable valuation will lead to many companies in the industry looking to expand to build scale and enter new markets. They may also look to go public or seek private funding, presenting further opportunities for investment bankers. Veterinary Services During the five years to 2018, IBISWorld forecasts that the Veterinary Services industry will benefit from increasing pet ownership, supported by mounting disposable income. Also, demand for companion animals will help drive demand for pets. As a result, veterinary services revenue is projected to grow about 3.5% per year on average to $37.6 billion, including an initial 5.8% increase in Two of the top 10 states with the most pet owners are in the Southeast, according to an American Veterinary Medical Foundation survey. About 62.4% of Arkansas residents and 62.1% of West Virginia residents own pets. IBISWorld projects that the total number of pets in the United States will increase to 193 million by 2018, marking an average annual increase of 2.2% during the five-year period. This increase, combined with general greater acceptance and demand for veterinary services and the region s heavy concentration of pet owners, will lead to more growth and consolidation activity, which should boost demand for investment banking services in the Southeast. In addition to higher pet ownership, pets are expected to live Veterinary Services longer and have different veterinary needs, due to advances in care. Similar to human healthcare efforts for the elderly, veterinary service providers will increasingly offer wellness programs with customized packages for aging pets. Many pet owners are willing to pay for pet treatments that were once reserved for humans, such as blood chemistry panels, urinalysis and transplants. This activity has led to mounting profit and establishment growth, increasing M&A advisory opportunities for investment banks. As veterinary services become more specialized, larger companies will increasingly seek to acquire smaller, specialized firms to increase their scope. This was the case in 2011, when Los Angeles-based VCA Antech Inc., a major player in this industry, bought BrightHeart Veterinary Centers, which

4 May included a prominent practice in North Carolina. VCA also snapped up firms in Florida, Georgia and South Carolina that same year; this highlights the M&A activity that has been brewing in this industry in the Southeast. This activity will continue over the next five years, demanding investment bank advisory, financing and general M&A services. Gym, Health and Fitness Clubs The Gym, Health and Fitness Clubs industry is expected to remain in a growth phase due to the Southeast s aging and overweight population, with revenue expected to rise at an average annual rate of 2.9% to $29.9 billion in the five years to Demand is expected to improve as the US economy stabilizes and unemployment declines, leading to higher disposable incomes and therefore increased gym memberships. Higher membership numbers will allow operators to spread their costs over a wider base, boosting profit. Profitability will also benefit from an increase in premium services like personal training. IBISWorld anticipates this move to increase the industry s profit margin to 8.5% of revenue by Industry profit also benefits from participants reliance on part-time labor, which significantly reduces overall wage expenses and gives health clubs greater control of employment and cost levels. About 32.9% of US adults aged 20 to 74 years old are obese, and this figure is growing. Eight of the top 10 states with the most obese people are in the Southeast, increasing the growth opportunities for gyms, health and fitness clubs. Greater investment in this region will mean opportunities for investment banks. Concentration in this industry is rising too, as larger operators enter new markets and Gym, Health and Fitness Clubs rapidly reduce costs per location through expansion, mainly through acquisitions. Significant M&A activity is expected to draw industry interest in investment banking services during the next five years. The Southeast houses the highest proportion of seniors in the United States. As baby boomers age past their 40s and 50s, healthcare costs will rise, creating incentives for insurers to promote preventative practices like fitness participation. In the next five years, the retiring baby boomer generation is expected to create strong opportunities for gyms, health and fitness clubs. Seniors pursuing active lifestyles will translate into more gym, health and fitness clubs opening in the region, which will boost demand for investment banks advisory, research and financing services as they seek to raise capital.

5 May Elderly and Disabled Services The Elderly and Disabled Services industry will grow strongly over the next five years, averaging 8.1% per year to $55.6 billion in 2018, as the large and long-living baby boomer generation ages and demands more formal, inhome care services. This industry provides outpatient social assistance services to improve the quality of life for the elderly, the mentally ill and people with disabilities. The industry has 19.3% of its establishments in the Southeast, which houses a high proportion of elderly residents. Government initiatives are another force driving revenue growth: more people are expected to seek care at home as opposed to institutional settings thanks to the Affordable Care Act. Rising disposable income will also allow more people to afford formal care, which will relieve family and friends from providing informal care at a time when unemployment is falling and reducing the availability of informal care givers. These changes during the next five years will augment industry revenue, including growth of 9.0% in This initial growth spurt could lead industry operators to also seek wealth management and alternative investment services from investment banks. Trade and Technical Schools The Southeast region accounts for the highest proportion of revenue and establishments of the Trade and Technical Schools industry and also has the lowest average number of employees per establishment, indicating that it has a higher proportion of small operators. This makes the region ripe for both organic industry growth and M&A activity, which investment bank services for small businesses support. Elderly and Disabled Services Unemployment, while slowly decreasing, will remain high and continue to boost enrollment in vocational training, causing revenue to return to growth during the early part of the next five years. In 2014, revenue will increase an estimated 2.7%. Operators in the Trade and Technical Schools industry are expected to leverage this growth using investment research services from investment banks to seek out funding for expansion. Florida is a regional powerhouse, accounting for 9.6% of national industry revenue and 42.0% of the Southeast s revenue. Given this region s expected growth in the healthcare sector, Southeast demand for healthcare trade schooling will rise as well. The vocations of medical technician, nurse s aide and dental hygienist are expected to increase in demand, driven by the aging population and increased use of technology in

6 May About IBISWorld Inc. Recognized as the nation s most trusted independent source of industry and market research, IBISWorld offers a comprehensive database of unique information and analysis on every US industry. With an extensive online portfolio, valued for its depth and scope, the company equips clients with the insight necessary to make better business decisions. Headquartered in Los Angeles, IBISWorld serves a range of business, professional service and government organizations through more than 10 locations worldwide. For more information, visit or call healthcare. These particular vocations will bolster Trade and Technical Schools industry revenue on average 2.6% annually in the five years to 2018 to reach $18.0 billion. As they expand, operators in the industry are expected to seek funding and advisory services from investment banks. Conclusion Investment banks can be poised to capitalize on the growth and restructuring of several industries in the Southeast. This region is home to a large number of industries with steady technological change, government policy and consumer demand, which will result in M&As and other investment activity in this region. The healthcare sector will be especially active in consolidation and restructuring over the next five years. During this time, such operators will have to adjust to the full implementation of healthcare reforms in As a result, industries providing health and other related services will increasingly demand Trade and Technical Schools business valuation and corporate finance services. This signals upcoming deal opportunities for investment banks, particularly in the Southeast. Contact: Savannah Haspel VP, Public Relations IBISWorld Phone: savannahh@ibisworld.com

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