EUR 850.00 For Business Accounts Only

Morningstar | Organic Growth Continues to Trend in the Right Direction for Surgery Partners

Born out of a private-equity-backed roll-up strategy that has left the firm saddled with a sizable debt balance and a less-than-optimal collection of surgical and ancillary service assets, Surgery Partners has struggled to meet public investor expectations since its IPO in late 2015. The acquisitions of NovaMed in 2011, Symbion in 2014, and National Surgical Healthcare in 2017 represent the core of Surgery Partners' operations, with investors concerned about the entity's ability to grow at marketlike rates on an organic basis going forward. In our view, this is set to change after a wholesale replacement of top management during 2018. With former Anthem CFO Wayne DeVeydt now at the helm, we think investors will likely benefit from his mega-cap company mindset and commercial payer expertise. We think management's initial portfolio assessment has begun to chart the right course for the firm, focusing on divesting noncore facilities and de-emphasizing its struggling ancillary services. However, stabilizing assets is only the first step in DeVeydt's vision for the business, as he expects to return to a steady pace of acquisitions in the coming years. Though we expect them be smaller tuck-in opportunities rather than the transformational deals that define Surgery Partners' past, we still think the firm's highly indebted balance sheet will remain a focus for shareholders. In the near term, DeVeydt will have to prove to them that allocating capital toward inorganic growth, rather than debt reduction, is the better use of shareholder funds.Ultimately, we see little opportunity for the firm to build a structural advantage that would culminate in a defensible economic moat. Low entry costs, negatively skewed negotiating power, and a dearth of scale advantages make moats in the provider industry, and ambulatory surgery in particular, exceedingly rare. We think the firm is more likely to be of strategic value to a larger, comprehensive health system, and we wouldn’t be surprised to see a sale after core operations begin to run more smoothly.