Gateway Chicago Retains Raymond James, Major Review of Strategic Options

Addiction Treatment Industry Newswire
04/07/2014 -ATIN – Gateway Foundation of Chicago, by far the largest addiction treatment drug rehab alcohol rehab services provider in Illinois and amongst the very largest and most influential providers of such services in the nation, has retained investment banker Raymond James, which is engaged in a wide ranging and thorough review of Gateway’s multi-state asset base. The Raymond James hire is in an effort to provide the non-profit’s board and management with a range of strategic options as Gateway mulls its future in an era of immense uncertainty, with Obamacare deeply influencing medical services delivery in general and also at a time when many in the tiny addiction treatment subsector feel that substance abuse care services is also at a crossroads.

Gateway’s Crossroads

Based in Downtown Chicago, Gateway is itself arguably at the biggest crossroads in its 40+ years of existence, having just pulled off one of the largest and most delicate mission transformations, one in which the intensely mission-driven non-profit faced many dangers and potential pitfalls, of any treatment institution in the 60+ year history of the contemporary addictions industry. Also driving home the crossroads position of Gateway Chicago, and what will make the strategic review being performed by Raymond James all the more critical, is the fact that Darcy will be retiring mid-year next and a new CEO will be in place, with a Korn Ferry-led search to begin soon.

Grant Writing Culture

Since its founding in the early 1960s, Gateway has been a publicly funded treatment provider, and thus its financial underpinnings were driven primarily by the culture of grant writing. But in 2008 the Gateway board handed CEO Michael Darcy a startling mandate – ramp funding from zero to one-third commercial insurance or face the possible implosion of an institution that delivered the lion’s share of addiction treatment services in the nation’s fifth most populous state. Behind the dire forecast was the financial shambles that was, and remains, the condition of the state government in Springfield and, to a much lesser extent, also the city 

government of Chicago, both beset and weighed down by enormous unfunded pensions promises made to public employees. Gateway’s board made this determination even before the onset of the recent monster recession – understanding that Illinois was far from being a reliable long-term funding partner and a diversified payor mix far more in the long-term interests of Gateway. So when the recession hit, it put even more pressure on Darcy, who was given five years to turn the Gateway ship around.

Five Years Later

Five years later, Darcy is a proud man. And justifiably so since he has accomplished one of most the complex management feats in the history of the addiction treatment business and put Gateway in the catbird seat for the future, a future for which Darcy is very strongly bullish. He points out that so few of those in need of substance abuse care are getting it that no matter what scenario for industry growth, the most possible optimistic or the least possible optimistic, growth off the low base means big growth rates and expansion for some time to come. “Even if you take a really modest growth scenario and then cut that in half or even more, you’re still talking about a growth outlook that virtually no other sector of the medical industry can match,” says Darcy, a wire thin, bespectacled man who is strongly engaged and highly enthusiastic when it comes to the addictions public policy debate. And, of course, there are few who know more about what they are talking about when it comes to that debate, with $80M expected to have flowed through Gateway in the 2014 fiscal year ending June 30. About $55M of that is the consumer treatment business in Illinois, with growth rates averaging just shy of 20 percent annually over the last two years, and $25M from a jewel of a corrections business working in four big states, New Jersey, Illinois, Missouri and Texas.

Raymond James

For Darcy’s part, he is over the near term more than content to remain focused on working the footprint 

in the Illinois home market, which he prefers to view through the lens of people served. Gateway will treat 15,000 people this year, brought in through the by now 15 highly trained outreach reps reporting to biz development chief Tom Delegatto.  But Darcy remains open to discussing a much more aggressive and expansive future for Gateway, pointing out that Raymond James – a team out of New York and Chicago led by Principal Richard Lorenti is on the case – will be presenting a preliminary strategic review by early summer latest, with a final full report due late summer/early fall. We here at Treatment Magazine have little doubt that the bankers will be laying out a scenario of tremendous acquisition opportunity for Gateway to which Darcy and the Gateway board are no strangers, having reviewed the industry in this respect ad nauseum, frankly. Darcy wouldn’t do a deal – actually he did one, acquiring an Aurora, IL provider way back – his over arching, and justified, caution telling him the risks on the public side were too high as were the prices on the private side. But that was well nigh on a decade ago and a lot has changed since then, most importantly the cultural and managerial transformation of Gateway itself, which we here at Treatment Magazine would argue strongly mitigates risk from the standpoint of being able to execute managerially post acquisition, especially when acquiring underperforming public properties in need of major sprucing up and also in need diversifying lopsided payor mixes.

A Question of Tactics

If Darcy and the Gateway board decide on growth by acquisition as a strategic option – given the overwhelming need for managerial expertise on the public side of the treatment business, at least a $20B a year marketplace with many thousands of providers, does Gateway have a duty to grow by acquisition? – then it becomes largely a matter of tactics. Some of the heavy lifting has already been done as regional powerhouses have emerged in the last couple of years, formed by large behavioral health mergers in Western and Northern Florida, Texas and the Mid-Atlantic states. Should Gateway acquire one of those and take on the role of becoming a major aggregator nationally of public behavioral health assets? All the while, of course, bearing mind such deals would take Gateway big time into straight up mental health – given our knowledge now of addictions and mental illness comorbidity is there even such a thing? – and away from its current laser specialty focus on addictions care. Or should a more modest regional approach be taken, where Gateway remains strongly focused on addictions only but, for example, might start aggregating in regions that are relatively prosperous and nearby like Southern Michigan/Northern Ohio with plenty of acquisition candidates and, especially in the case of Ohio, that have state governments and governors that are loudly espousing the need for more treatment and putting their money where their mouth is?     

read our report on a major merger in Northern Florida

read our report on a major merger in Western Florida

read our report on a major Baltimore Merger

read our report on the merger of Texas’ Two Largest Non-Profit Providers

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