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Universal Health Services is expanding into the UK market

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Jan. 6 2015, Updated 1:15 p.m. ET

Geographic diversification

The US healthcare industry, represented by the Healthcare Select Sector SPDR ETF (XLV), is expanding its footprint in overseas markets such as the UK, Mexico, Brazil, China, and India.

Acquisitions in the US are subject to stringent antitrust regulations enforced by the Federal Trade Commission (or FTC). In several acquisition cases, the geographical overlap of the acquirer’s facilities with those of the target company forces the acquirer company to divest some facilities as a precondition to the acquisition. This has been one of the major drivers for American companies expanding in foreign markets.

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Overseas operations

The graph above shows the number of facilities run by hospital operators such as Universal Health Services (UHS), HCA Holdings (HCA), Davita Healthcare Partners (DAV), and Acadia Healthcare (ACHC) in markets other than the US. In September 2014, Universal Health Services entered the UK market by acquiring Cygnet Healthcare, a leading behavioral health provider, in an all-cash deal of $335.0 million. The acquisition added 18 facilities and approximately 750 licensed beds to Universal Health Services’ behavioral health portfolio.

Besides providing a platform in the UK market, the acquisition of Cygnet Healthcare is expected to add to Universal Health Services’ earnings per share of $0.10–$0.12 in the first year. Cygnet Healthcare’s business model is similar to that of Universal Health Services, including financial reporting standards, operating margins, treatment and clinical protocols, and language of communication, reducing post-merger integration risk.

The National Health Service (or NHS) is the publicly funded healthcare system in the UK. The majority of the UK population obtains health insurance through the NHS. The private behavioral health industry mainly focuses on patients not treated by the NHS owing to lack of capacity. Also, as the NHS doesn’t focus on creating new capacity for treating specialty illnesses and especially behavioral patients, Universal Health Services can capitalize on the opportunity to capture market demand.

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