Hanger to buy larger rival

No. 2 prosthetics firm will pay $455 million for NovaCare division

Medical products

April 06, 1999|By M. William Salganik | M. William Salganik,SUN STAFF

Hanger Orthopedic Group Inc. of Bethesda, the country's second-largest provider of braces and artificial limbs, said yesterday that it was buying the country's largest for $455 million in cash and assumed debt.

Hanger, which has been growing by small acquisitions, would more than double in size with the acquisition of NovaCare Orthotics & Prosthetics Inc., a subsidiary of NovaCare Inc., a rehabilitation company headquartered in King of Prussia, Pa.

"It gives us a national program and sets the platform for a global expansion," said Ivan Sabel, chairman and chief executive officer.

The deal will be neutral to Hanger's earnings per share in 1999, the company said, but should improve EPS by 10 percent next year.

Announcement of the deal pushed Hanger stock up $1.875, or 14.4 percent, to $14.875 a share. NovaCare stock closed at $1.625 a share, up 43.75 cents, or 36.8 percent.

The deal boosts Hanger by giving it "a truly national footprint," by allowing the company to be "the consolidator of choice going forward," and by allowing it to reduce overhead and improve profit margins, said Christopher D. McFadden, an analyst with First Union Capital Markets in Richmond, Va.

In addition to 369 NovaCare locations, giving it 625 in total, Hanger gains proprietary technologies in socket construction and in clinical protocols for patients with arm amputations, Sabel said. Also, since Hanger also manufactures and distributes artificial limbs and braces, it, in effect, buys a major customer for itself.

Although the deal is subject to antitrust review, McFadden said, "when you look at the combined market share and degree of fragmentation, I don't anticipate a problem."

The consolidated company would have about a 23 percent market share in an industry approaching $2 billion a year in sales. While NovaCare and Hanger have been significant accumulators of practices, the industry is "highly fragmented beyond those two," McFadden said.

By buying its largest rival, Hanger took a giant step in the consolidation it had been achieving through many small steps. The company traces its roots to James Edward Hanger, a Confederate amputee in the Civil War. According to the company's history, Hanger, after losing his leg in battle, developed an artificial limb from whittled barrel staves.

Its development as a publicly traded national consolidator has occurred over the past few years.

Even before the NovaCare deal, Hanger had tripled in size in two years by consolidating small orthotics and prosthetics practices, going from $66.8 million in revenue in 1996 to $187.9 million in 1998.

In 1998, it bought 17 orthotic and prosthetic practices and a manufacturing company for a total of $39.1 million, according to Bloomberg News.

But it will now more than double again in size, as the acquisition creates a company that had 1998 revenue of $486 million.

NovaCare, needing to raise cash as its rehabilitation business ran into trouble with lowered Medicare reimbursements, put its orthotic-prosthetic unit up for sale. Sabel said "an auction process" resulted, with Hanger submitting the top bid.

The expanded company, Sabel said, will be run by a team of 14 top executives from Hanger and 10 from NovaCare. Sabel will remain as CEO. NovaCare's Ronald G. Hiscock will be president and chief operating officer.

Headquarters employment in Bethesda, now about 75, should double over the next year as NovaCare employees are brought in, Sabel said. Combining the two executive staffs would result in elimination of some jobs, but less than 100, he said.

In general, Sabel continued, he does not expect to close patient care practices as a result of the combination, although a few practices might be combined in markets where there is overlap.

Pub Date: 4/06/99

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