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In Another Mega Deal, CRC Acquires Aspen Education
October 2006

Nation's Largest Treatment Provider Gains Biggest Slice of Booming Therapeutic Schools Market

Rocking the addiction treatment industry with yet another monster acquisition, CRC Health Corporation - already the nation's largest treatment provider through a series of deals masterminded by CEO Barry Karlin - announced in early October it had reached an agreement to purchase therapeutic schools and programs leader Aspen Education Group.

Proving yet again that Karlin is willing to pay up for what he wants - in May 2005 he bought venerable Sierra Tucson for $130 million, the largest sum ever offered for a single treatment center - CRC has agreed to pay Aspen's investors a sum that assigns an enterprise value of almost $300 million to the fast growing company.

In an interview earlier this year, Aspen CEO Elliot Sainer, who will run the company as a separate CRC division and also join the CRC board, told Treatment Magazine he expects Aspen's revenues will reach $150 million this year. Expansion has been quite swift for Aspen since it was sold by College Health Enterprises in 1998, with revenues at the therapeutic schools leader amounting to just $28 million that year.

As part of its May Special Report: Adolescent Treatment, Treatment Magazine described a growth environment in the adolescent private pay market that has, to a large extent, been fueled by therapeutic schools pioneers like Aspen in recent years, with the result that in 2005 estimates were that 100,000 youths attended therapeutic schools and programs, which now garner $1 billion in sales annually. Certainly, more traditional purveyors of adolescent treatment services - Hazelden and Caron have large adolescent operations, a few places like Rosecrance have expanded their adolescent treatment services in recent years and CRC already owns seven adolescent programs - seemed to be treading water in managed care's wake. According to SAMHSA data, adolescent referrals from sources that tend to refer to private centers - schools, healthcare providers and self-referrals - have declined drastically in the 1990s to 38 percent of all referrals from 50 percent. During the period, justice system referrals have soared, with the principal beneficiaries being big public providers like Phoenix House, which, ironically, has seen strong expansion of its therapeutic schools that are similar in nature to Aspen Education's private pay therapeutic school offerings.

With the Aspen acquisition, which is expected to close in November, there has been renewed speculation that Karlin might launch an IPO of CRC, talk of which began to increase after the Sierra Tucson deal last year. Instead, Karlin sold CRC for a whopping $720 million to private equity powerhouse Bain Capital in a deal that has loaded CRC with debt. (See Chart)

"An IPO is certainly one option, " says Karlin, adding that an IPO had also been a possibility after the Sierra Tucson purchase. "With Aspen, we now have even more scale, and Wall Street does indeed like scale."

But Karlin points out that conditions in the market for IPO financings will be a key determinant going forward on whether or not CRC will sell shares to the public any time soon. And, in recent months, private equity and venture capitalists have been complaining vociferously about poor conditions for launching IPOs, which is the main financial exit strategy for most of these players.

But if conditions improve - or investment bankers see good potential demand for CRC stock despite poor overall market conditions - and CRC decides to sell shares, it would be the first time investors had access to a pure play addiction treatment investment since Sierra Tuscon founder Bill O'Donnell took his center public in the midst of the treatment industry's go-go years during the late 1980s.

But while Sierra Tuscon was certainly a pure play addiction treatment investment - and O'Donnell made over $30 million through very astute timing of sales of his stake to the public - the extent to which CRC will remain primarily an addiction treatment enterprise is becoming open to question. Certainly, many of the acquisitions in recent months for CRC have been mostly psychiatric in nature - private pay eating disorder centers, for example. Also, many of the recent purchases have been at the nexus where psychiatric disorders and addiction meet, such as the Sierra Tuscon and Wellness Resource Center dual diagnosis acquisitions.

Although there is also a strong component of addiction treatment at Aspen, which is itself a deal that moves CRC heavily into the private pay psychiatric market for adolescents, Karlin points out that there are tremendous referral synergies with CRC's existing operations and those that will be added soon from Aspen.

Karlin's strategy of acquiring institutions that have the potential to have these strong cross-referral synergies - all the way from the extensive opiate clinic operation, to the traditional treatment centers and more recently eating disorders and dual diagnosis - seems to be paying off. Even when the effects on sales growth of the acquisitions are stripped away, revenue growth at CRC has still been advancing at quite a substantial clip. CRC's same facilities growth number, which measures the revenue increases at centers or opiate clinics opened or owned at least one year, has averaged about 10 percent a year since 2003, although this organic growth has been tapering off in recent periods. It is strong underlying fundamentals like these, as well as the continued opportunities for growth through acquisition, that will be attractive to potential investors should CRC decide to launch an IPO.

But Karlin points out that, even if he decides to hold off on offering shares to the public, CRC is already a public company because it recently launched a public bond issue through an offer to exchange bonds placed as a result of a private deal for virtually identical bonds that are now traded in the market for public debt.

The result is that CRC must report on its operations in virtually the same manner as if its common shares were publicly traded. This also means that CRC's debt is now rated by the public bond rating agencies, whose leveraged finance specialists have assigned quite speculative credit ratings to CRC, recognizing the substantial debt burden taken on after the Bain Capital deal.

With his recent acquisitions, Karlin has most definitely been moving CRC toward a wealthier patient income demographic, with the result that by the end of 2005 about 25 percent of CRC's total revenues came from private pay for residential services. With Aspen, which deals exclusively with a private pay clientele, that number is likely set to move substantially higher. And while Karlin paid up handsomely for Internet marketing capability when he bought web marketer 4therapy.com last year - gaining the expertise of founder Howard Brown along the way - the acquisition is likely to prove critical considering CRC's increasing reliance on private pay. TJ

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