Bill O'Donnell says he initially had no thought of selling Sierra Tucson, despite having recently sold a majority stake in its sister company, Miraval spa. "But as things moved forward with CRC it became apparent that a deal would probably get done, so I resolved to let go," he said. In the end O'Donnell did let go, selling the institution he founded over 20 years ago for what is probably the highest price ever paid for a single treatment center, $130 million.
The sale caps a career in which O'Donnell remained associated with Sierra Tucson through all of the sharply swinging fortunes of the treatment business over the past two and a half decades. And through it all, O'Donnell has emerged as among the most successful entrepreneurs in the 150 year history of the U.S. addiction treatment industry. What started it all was an appearance on The Bill Donahue Show by O'Donnell in the mid 1980s in one of the first instances of a person going public about their addiction struggles. Sierra Tuscon sales began to soar with the publicity, which included the pathbreaking Fortune Magazine article, pictured here, of which O'Donnell formed the centerpiece.
"Bill is a very astute businessman," said hotelier George Ruff, whose own astute financial maneuvering helped recapitalize Sierra Tucson at a critical juncture in the 1990s. "He's also one of the most knowledgeable guys in the industry when it comes to the clinical side and care delivery." No doubt. Since O'Donnell invested in Sierra Tucson in 1984, the venerable facility has become synonymous with cutting-edge high-end treatment, spawning a host of imitators, especially nearby in Arizona but also throughout the nation. And while his business skills in the clinical area are known in the industry, what is somewhat less well-known are O'Donnell's financial skills and his seeming virtuoso mastery of the treatment industry business cycle, skills he has applied in manner that would be the envy of Wall Street's savviest hedge fund managers. Over the years, O'Donnell has made many tens of millions through well-timed sales of Sierra Tucson stock when the company was public, and then through an equally well-timed transaction that took the company private again.
"Better Lucky than Smart"
But "better lucky than smart" has long been a favorite mantra of Wall Street traders, and modest O'Donnell -and even his associates - would have us believe that that's exactly what O'Donnell has been: luckier than smart. "I really think it was luck," said Ruff, who brought his extensive hospitality industry experience to the board after the Miraval spa opened in 1995, later partnering with O'Donnell to take the company private in 2001. "It was really just the way transactions worked out." O'Donnell agrees, saying there was no grand plan, just a series of fortuitous transactions. "It was just pretty lucky the way things worked out," he said. If O'Donnell is just lucky, then it's the kind of luck that seems to run in the family. His father, William T. O'Donnell, Sr. also built a fortune from a series of well-timed transactions and was equally a pioneer in his own industry, the gaming machine business. O'Donnell Sr. ran sales at Lion Manufacturing in 1963 when the old-line pinball and slot giant was teetering on the edge of insolvency. O'Donnell Sr. led a buyout of the ailing firm, becoming its president and renaming it Bally Manufacturing. He focused the company on Nevada and the slots business and by 1968 an incredible 94 percent of slots sold in the state were Bally machines. According to one industry observer, O'Donnell Sr. was "quite simply the man who brought slots into the modern era," with the name Bally now synonymous with the word gambling.
O'Donnell Sr.'s transaction at Lion Gaming is uncannily similar to the transaction that would be his son's most successful, the taking of Sierra Tucson - by then renamed NextHealth with a new focus on "wellness" - private in 2001.
But the going private deal wasn't by any means the only large scale transaction undertaken by O'Donnell with respect to Sierra Tucson. In fact, O'Donnell took the company private only after first taking it public back in 1989. "We got approached by [investment bank] Oppenheimer when health care was red hot on Wall Street and the banks wanted every health care deal they could get their hands on," said O'Donnell. "It was nothing we thought up." So, O'Donnell took the company public, netting $11.4 million, just at the time that Sierra Tucson's revenues really began to skyrocket. Between 1989 and 1991, the treatment center's sales quadrupled from around $10 million to over $40 million, an astounding performance even considering those were the hottest of the treatment industry's go-go years. Equally astounding, though, was O'Donnell's decision to sell even more shares in June 1991 at pretty much the exact top of treatment industry business cycle, an uncannily well-timed transaction. O'Donnell netted $22.8 million this time, and once again it wasn't anything he planned: "It was the banks, they just wanted more stock." In 1992 came managed care, and the treatment industry's practice of charging what it wanted, when it wanted wasn't in vogue anymore with the payors. The ride down at Sierra Tucson was equally as roller coaster-like as the ride up had been, but not nearly as much fun. O'Donnell says that at the time, 70 percent of Sierra Tucson's revenues came from insurance carriers, unlike now where that number is much lower. Revenues plummeted, falling 75 percent between 1992 and 1994 to $10 million, putting the company exactly back where it had been when it went public in 1989. During the intervening period, O'Donnell took about $35 million in profits on his stock transactions, and now still owned 30 percent of Sierra Tucson, albeit a considerably less valuable Sierra Tucson.
O'Donnell and the Sierra Tucson board's reaction to managed care was ultimately in 1995 to diversify the company and broaden its scope, changing the company's name and building the now famous Miraval spa, with a new overall focus on the "wellness" market. "There is no doubt this was a rough and uncertain period," said Ruff, pointing out that cash flows from the treatment business had fallen to just $2 million annually and that early on Miraval was bleeding about $3 million a year in cash. Ruff stepped up and plied his real estate contacts, helping make a deal with Apollo Real Estate Advisors to recapitalize NextHealth, in exchange for which Apollo effectively took a big equity position in the company. In 2001, Apollo approached O'Donnell wanting to cash out its investment. O'Donnell and Ruff got together and closed a deal to take NextHealth private, valuing the company at around $80 million. Three years later, the two no doubt did very well selling 70 percent of Miraval to the legendary Steve Case, who built AOL into an Internet giant in the 1990s. Then, CRC Health Group stepped up in May with $130 million to buy Sierra Tucson.
Steve Case and "Wellness"
With their remaining 30 percent share of Miraval, O'Donnell and Ruff still have a big stake in the fast-growing wellness market. O'Donnell is CEO of the new Miraval entity, a cornerstone of Steve Case's new company Revolution, which the entrepreneur is funding with $500 million of what he has left over from the disastrous merger he engineered between AOL and Time Warner. Revolution is making a wide variety of investments around the wellness theme, along the way tackling the nortoriously unreformable U.S. health care industry. O'Donnell is now overseeing a vigorous expansion of Miraval, which is planning a huge buildout at the existing site near Sierra Tucson in Arizona, expanding the property from 36 to 315 acres. Along with the physical expansion comes an expansion into real estate sales, with homes being developed on the property as well as "hotel/condo" villas. O'Donnell is actively scouting locations in places like Mexico's Mayan Riviera and along the East Coast of the U.S. A lot of effort was spent on a deal to bring Miraval to Hawaii in partnership with the Kapalua Land Company, but according to O'Donnell what had seemed like a done deal fell through ultimately because Kapalua saw the Miraval development as exclusively a mountainside resort, with Miraval insisting also on having an oceanside element.
"Maybe When the Non-Compete runs Out"
While Ruff sees O'Donnell achieving outstanding results with the Miraval spa, he says that O'Donnell's heart and truly exceptional talents lie in the treatment industry, which Ruff believes is poised for a period of strong growth. But when asked whether we'd be lucky enough to see the lucky Bill O'Donnell plunge back into the business, all Ruff would say was: "Maybe when the non-competes run out."