Is Sum of CRC Health Corp Parts Now Worth More Than the Whole?

Addiction Treatment Industry Newswire
11/10/2012 -ATIN- After nearly two decades in existence pursuing an unfocused growth by acquisition strategy, followed in recent years by efforts of a new management team to deal with the fallout of that lack of focus, the question on the minds of many addiction treatment drug rehab alcohol rehab executives is whether the sum of CRC Health Corp’s parts may now in fact be worth more than the whole. In other words, is it now time for CRC owner Bain Capital to break up the addiction treatment empire it acquired seven years ago for nearly three quarters of a billion dollars?

Waiting To Scoop up Assets

“We couldn’t agree more with that assessment of CRC,” 

says one especially deep-pocketed addiction treatment CEO. “We don’t see that CRC as a whole could fetch much of a [cash flow] multiple, but there are assets there that we would be on the buy side for if they were ever put on the block.” Other treatment executives interviewed by Treatment Magazine expressed similar sentiments, as well as similar desire to scoop up select assets if they ever came up for sale, essentially saying that CRC’s strategy has pretty much turned out to be a failure. Says one addiction exec: “I don’t see any reason for CRC to exist as a corporate entity except for the head office to suck up tens of millions in additional expenses and for Bain Capital to get their usual private equity management fees.” [We at Treatment Magazine don’t necessarily agree. The Internet marketing machine set up by CRC corporate, begun with the brilliant (lucky?) $9M purchase of 4therapy.com, is matched only by Elements Behavioral, which, in fact, has modeled its highly aggressive Internet marketing on CRC.] Says another exec: “If it weren’t for the methadone clinics, CRC probably could not have survived paying way too much for [adolescent therapeutic schools leader] Aspen Education and the big write downs and losses that came along with that purchase, which came at the worst [financial crisis] timing.”

Small Risk Diversification

A major reason behind growth by acquisition strategies, often, is that greater size will produce risk diversification across a Sierra Tucson, shown here, accounts for 25 percent of CRC's free cash flow

larger base of assets. But what isn’t widely known is that CRC is super highly dependent on one asset, world famous Sierra Tucson, to provide the cash to support the enormous debt load of Bain Capital’s leveraged buyout. According to SEC filings, Sierra Tucson is, and has been for some time, responsible for producing about 25 percent of CRC’s overall free cash flow. Thus when Sierra Tucson runs into severe regulatory trouble, and has its license suspended by state authorities for numerous violations, the reputation of the asset comes to be at severe risk. That risk increases when wrongful death suits are filed, whether meritorious or not. As any high end treatment CEO knows, a luxury center’s reputation is its greatest asset and Sierra Tucson’s has been put at grave risk over the last year or two in the wake of the above two occurrences. Client flows can disappear in a flash when the wrong news story gets national prominence and goes viral. With CRC’s overall dependence on Sierra Tucson’s big profits, the center’s recent troubles have put the ENTIRE enterprise at risk and thus risk diversification has been minimal to non-existent at CRC despite its being by far the largest addiction enterprise on the planet.

Methadone Slows, Competition Grows

When CEO and founder Barry Karlin, very quietly, entered the methadone business about fifteen years ago, it was a HUGE hit with institutional investors. Big international names like DLJ, Credit Suisse and OMERS piled in, NOT because they saw big opportunity in 

BHG - Behavioral Health Group
addiction treatment but because they knew a roll up of the then woefully mismanaged methadone biz was a no brainer to back a highly leveraged investment play. These guys were around for a good time not a long time, with OMERS getting out less than three years later and bragging a big 35 percent annual return to its investors. The problem with CRC’s methadone play, upon which the entire enterprise is HUGELY reliant, is now two fold. First off, there are a lot of entities out there seeking to emulate the methadone roll up success and its initial eye-popping nearly 40 percent operating profits. Call up Medmark Services on the Internet and see if what they are doing doesn’t sound familiar, having gotten $10M in growth capital back in 2008. Another one is Behavioral Health Group, founded less than two years ago and already with over 20 clinics in a bunch of states. And there are more, lots more, players like these now. Of course, the other big problem for CRC’s methadone clinics is the fact that methadone, as an opiate replacement therapy, has probably peaked out in terms of growth. The reason for that, again of course, is the Suboxone juggernaut, a medication that in most cases is superior in every way to methadone. Here are the facts: U.S. methadone maintenance has remained flat in recent years at about 200K enrollees, while people on Suboxone climbed to over 500K last year and continue to rise like a rocket. Analysts are saying Suboxone sales may hit $1.5B this year, up from $1.2B in 2011.

CRC’s 3Q This Week

If tradition holds, CRC will release its third quarter financial results early this week. Treatment Magazine wrote earlier that this year’s second quarter numbers showed definitively that CRC’s addiction industry aggregation effort has been a failure for Bain. And while we expect that the former Aspen assets will continue to show a pretty strong turnaround – though off a MUCH smaller base – we don’t think CRC’s 3Q numbers, or any other quarterly numbers in the future, are ever going to show success for the House That Karlin Built. CRC doesn’t make any sense as a corporate entity, not the least because it has lost its first out-of-the-gate advantage and there are now lots of other well financed entities out there in the addictions acquisition and aggregation game.

Divestiture Tour de Force

Perhaps its time for Bain to realize it’ll likely get more for CRC  piece by piece, especially in today’s buy side environment, than it likely ever will trying to sell the company whole. But selling CRC piece by piece would be a feat easier said than done, and if attempted and achieved successfully, would amount to a divestiture execution tour de force unmatched in the annals of behavioral health finance.

read what Barry Karlin told Treatment Magazine in 2005 and u decide if CRC has stayed focused to its strategy 

read Treatment Magazine’s pathbreaking article on CRC’s methadone cash cow

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