Managed service provider (MSP) penetration has reached a new all-time high, according to Staffing Industry Analysts’ 2014 Contingent Buyer Survey, in which the proportion of all buyers that reported using an MSP rose to 62 percent on a three-year moving average basis. The economics of the MSP business rewards scale, both for the company operating the MSP and other agencies that staff workers through the MSP. Each of these factors contributed to a recent piece of news — perhaps the most significant event in the healthcare staffing industry thus far in 2014.
It was announced on June 2 that Cross Country Healthcare Inc. (NASDAQ: CCRN) agreed to acquire Medical Staffing Network (MSN) for $48.3 million in cash. The two companies ranked fourth and sixth, respectively, on the 2013 Largest U.S. Healthcare Staffing Companies list. Their aggregated revenue would move Cross Country up to the third slot, ahead of Jackson Healthcare, with roughly a 7 percent share of the U.S. healthcare staffing industry. Further details of the transaction were covered in our Daily News article.
With about three quarters of its business in per diem nurse staffing, MSN was the second-largest player in that segment, supporting clients through its network of 55 branches nationwide. In comparison, Cross Country had just 18 branch offices before it acquired the Allied Healthcare staffing business of On Assignment (NYSE: ASGN) last December. The breadth of the combined network was cited by management as a primary strategic consideration in the purchase, accelerating Cross Country’s expansion plans “by several years.” This will enable the company to improve service for its current 29 MSP clients, which constitute about a quarter of its total revenue, and better position it to win new contracts. Bill Grubbs, CEO of Cross Country, said they were able to fill just 35 percent of the per diem orders they received in 2013, and he believes they can bring that fill rate up to 90 percent over the longer term.
High interest expense due to its historically heavy debt level along with the overhead inherent in maintaining all of those branches have made it challenging for MSN to operate profitably over the years, particularly during industry downturns. This likely contributed to the relative bargain Cross Country got in the purchase, which valued MSN at 0.21x its unaudited 2013 revenue of $229 million. By comparison, shares of CCRN were trading at approximately twice that multiple pre-announcement. That said, it was asserted that MSN operated “near breakeven” in 2013, and had generated slightly positive adjusted EBITDA on $78 million in revenue for 2014 through April 30.
Cross Country expects the deal to reduce its 2014 earnings per share (EPS) by $0.10 - $0.12 due to $7 million to $9 million in one-time charges on the transaction and integration. However, it is anticipated to be accretive to 2015 EPS to the magnitude of $0.12 to $0.15 through the realization of $12 million to $14 million in annualized cost synergies. About 75 percent of those savings will be due to headcount reductions, and the company plans to close 11 branches that overlap, leaving approximately 70 local offices in total.
Having now made two sizable acquisitions over the past six months — both paid for in cash and financed by adding debt to the balance sheet — Grubbs says he doesn’t anticipate any more transactions in the near term, and that the company will now concentrate on integration activities. It will be interesting to monitor merger and acquisition activity over the remainder of 2014 to see if any of Cross Country’s peers in the healthcare staffing space follow its acquisitive path and, if so, whether any acquisitions are likewise driven by the expanding reach of MSP in the industry.
