DEAL ANALYSIS: Elements Behavioral Closes The Right Step of Texas Acquisition

Too Busy

Maybe Elements doesn’t comment on its transactions because it’s been too busy doing them. Since its iconic purchase of legendary Promises of Malibu about four years ago, it has moved steadily to fulfill its economic mission of addiction treatment industry asset aggregator, along the way taking over the role of  “go to” treatment center buyer that was formerly undertaken by CRC Health Corp. CRC has  lately been cleaning up the mess of more than fifteen years of unfocused asset buys by company founder Barry Karlin, doing few acquisitions outside of its methadone business. Ironically, though, CRC is still involved in a tangential way in that it is their money that Elements has been using to buy $50M or so worth of treatment centers in recent years. In a 2006 asset sale tour de force, Elements financial backer Frazier Healthcare of Seattle sold youth therapeutic schools giant Aspen Education, which Frazier had patiently built up over almost two decades, to CRC at pretty much the exact top of the therapeutic schools industry business cycle. Leaving CRC saddled with some pretty intense clinical quality problems at Aspen, Frazier took its CRC therapeutic schools killing and promptly hired Sack to do what CRC had been doing for years – no non-compete?!! – which is to build a treatment enterprise with a national footprint using a growth-by-acquisition model. And while CRC has been busy writing down a huge portion of the almost $300M it paid for Aspen, and responding to lawsuits there and elsewhere in its far flung treatment enterprise, Elements has been busy buying centers in seven states, including Lee McCormick’s The Ranch in Tennessee, The Recovery Place in Florida and now The Right Step.

What Price The Right Step?

The question for treatment entrepreneurs now that the Right Step deal has been finalized is, of course, …how much did Joseph get for the Right Step? (Treatment Magazine estimates its annual revenues at around $28M) The answer, as is so often the case in business and, indeed, life itself, depends on the answer to another question, which is …why did Joseph sell? Talking with Joseph earlier this year, it was clear to us here at Treatment Magazine that he was  making a gutsy, and quite risky, play by acquiring the troubled Taos, NM, private pay youth center San Cristobal, for which he paid very little if anything and which was outside The Right Step’s core competency – in-network affordable care. It could be that, six months later, as he surveyed the difficult private pay landscape for expensive youth centers, Joseph decided to quickly sell before San Cristobal started really bleeding red ink, spilling over to affect the value the core affordable, in-network Right Step assets,  which are concentrated in Houston. It could also be that Joseph, after twenty years and who has some health issues, may have just decided it was time to “hit the bid,” take his money and relax with his family for a while. (It’s unclear whether Joseph will spend much more than a transition period working for Elements, although he did say he was “thrilled” in the press release.) Depending on whether The Right Step was perhaps heading toward, or already in, trouble or whether it was doing well and Joseph just decided to cash in, Treatment Magazine estimates that Elements paid anywhere from $6M to $12M for The Right Step, with our hunch leaning toward the low end since we suspect that, except for the marquee Promises buy, it has been Elements’ strategy to purchase quality assets relatively cheaply. Joseph will definitely benefit in one way from the deal – which likely involved Elements signing some long-term real estate leases with Joseph – because sources tell us that Joseph for years charged Right Step below market rents, something he wouldn’t likely do for Elements. So, if the deal was a little lite upfront – and that’s a big if – Joseph can perhaps comfort himself with the fact he landed a super high quality long term income stream which can be used to husband the real estate in a bad market while waiting for a better future.

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