by Maureen Flanagan
Patriot Medical Technologies, Inc., was on track with an ambitious expansion strategy in the growing market for medical equipment asset management services. Off to a good start on their base business plan, Patriot's founders were poised to make their first acquisition -- Novare Services, Inc., a leading company in the same field. However, they had difficulty finding a financial partner that could offer the long-term funding they needed. Patriot Medical was referred to American Capital Strategies (Nasdaq:ACAS), a specialty finance company with the capital resources and capabilities to provide the long-term partnership Patriot desired. Teaming with Patriot, ACAS was able to put the transaction back on track and secure the acquisition with an investment of $5.5 million in senior and subordinated debt with warrants.
"With the acquisition of Novare, Patriot Medical is on course to become the nation's leading independent provider of high-quality equipment service to hospitals and other health care providers," said Patriot's President and CEO Richard Naylor.
Based in Nashville, TN, Patriot Medical contracts with hospitals and other health care institutions to offer asset management, testing and repair services for diagnostic and other medical equipment. The services contracted out to Patriot range from service calls to complete outsourcing contracts that include maintaining equipment, evaluating purchases, assisting with budgeting, keeping records for regulatory and accreditation compliance, scheduling maintenance calls, and providing in-house technical support. As more health care providers turn to outsourcing to reduce overhead and administrative costs, asset management services are thriving. By contracting out these services, hospitals can utilize their capital investments more cost-effectively.
Since its inception in 1997, Patriot Medical offered these services through affiliates it had established in Boston, Chicago, Little Rock, and Nashville. Patriot's growth strategy is to build its affiliates and acquire the star performers. It also seeks to acquire other high-performing companies in the field that are compatible with its growth-oriented strategy.
Novare fit perfectly with Patriot's overall expansion goals. Headquartered in Cincinnati, OH, Novare was founded to provide total management and maintenance of all patient care equipment for the Catholic Health Initiatives, Inc., (CHI) hospitals, which included the Sisters of Charity Health Care Systems. In 1993, Novare expanded its equipment contract management services outside the CHI system, more than doubling its business.
In 1998, CHI decided to spin off the non-CHI portion of the business by selling Novare without the CHI operations. This created a prime acquisition opportunity, one that was too good to pass up, according to Naylor. Novare had established a reputation for excellent performance, often saving its client hospitals up to 15% to 20% a year in equipment maintenance expenses. The company was headed by an experienced management team, and growth of its non-CHI business had been strong, with projections of solid future growth and margins at historical levels.
Patriot eagerly began the acquisition process, but had an interim financing source and encountered difficulty finding the right long-term financial partner. Through contacts in the industry, Patriot found American Capital, who provided the resources, funding and long-term partnership capabilities they desired. "American Capital was quickly able to step into the acquisition process and put a complex transaction together," said American Capital Principal John Freal. "This included researching the industry, performing due diligence, and splitting a subsidiary from a non-profit company - all in a timely fashion." With capital resources in excess of $250 million, American Capital provides a wide spectrum of expertise and financing to middle market companies in need of capital for acquisitions, employee buyouts, management buyouts, recapitalizations, liquidity and restructurings. In 1998, American Capital deployed more than $150 million in 14 different transactions. Its investment portfolio is widely diversified, ranging from manufacturing and services to food and beverage.
"We are always pleased to support strong management teams -- which includes those of both Patriot and Novare," said Freal. "With the Novare acquisition, Patriot becomes the nation's fourth largest independent service provider and is in a position to execute a business plan that it expects will lead to being number one." The acquisition gives Patriot immediate synergies and opportunities to aggressively bid for new contracts in new markets. In addition, Novare's name and reputation boosts Patriot's position in the marketplace and its employees significantly complement Patriot's team.
In an era when 40% of the 5,000 U.S. hospitals have turned to outsource companies to manage some portion of their operations, the market for Patriot Medical's services is strong. Patriot's acquisition strategy also comes at a time when medical equipment services are flourishing. Healthcare providers currently spend some $6 billion for equipment maintenance, expected to increase to more than $7 billion by the end of 2001. Fueling this growth are the increased use of equipment with expired warranties, complex equipment requiring skilled service providers, and greater use of sophisticated hospital technology to enable shorter patient hospital stays.
Long-term, Patriot Medical will pursue its acquisition strategy in key markets, forming hubs of Patriot-owned asset management firms that have a strong regional presence, according to Naylor. Regionalism is desirable because hospital equipment is often managed by a corporate office far from the actual site where the equipment is located. Patriot's plan brings the decision making closer to home and helps hospitals compete more effectively for their maintenance contracts. It also affords service providers the marketing power, access to group purchasing rates, network integration, and wider scope of services a nationwide company can offer. The opportunity also exists for Patriot to expand the customer base beyond hospitals to include other medical facilities, such as ambulatory care centers and satellite health centers.
Patriot's business model offers lower cost solutions to the management, maintenance and repair of sophisticated equipment. As such, it provides value to its customers and keeps the country's increasingly sophisticated medical equipment operating safely and cost-effectively. Led by an experienced management team, Patriot Medical has established itself as one of the country's top independent providers of high-quality equipment services and is well positioned to realize its vision of becoming the industry leader.
