A Bold Reset in Rehab M&A
What does ATI's decision to go private signal for the rest of the industry? Paul Martin shares why this bold move could bring renewed competition, and new opportunity, for rehab owners eyeing growth or sale.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good morning and welcome to another episode of the Martin Rehab M&A Advisory. I'm Paul Martin, founder and president of Martin Healthcare Advisors and it is days like today that make doing what I do something that I absolutely love. Today we are going to dive into a major move that we believe has the potential to reshape the landscape of physical therapy mergers and acquisitions. ATI physical therapy has officially gone private. Now for those of you who are currently running a seven clinic up to maybe 40 or 50 clinics, you know, a large multi-site rehab company, this is not just another headline for you.
This is absolutely a market signal. And over the next 15 minutes, I'm going to break down how ATI kind of got into the mess that they were in and how they are now doing everything they can to climb out and why their move to go private may potentially unlock growth again for ATI. And then finally, how will this affect your company and the merger and acquisition market moving forward? So, let's go back a little bit and start, you know, where all this started for ATI. And by the way, seven plus years ago before again they went public, we did several successful transactions with ATI and we were able to work extremely well with our acquisition team and many of our clients also worked successfully with their operations teams all over the country.
Well, ATI went public via a spa in 2021 and they had sky high projections but very minimal margin for error which is always the case in the public market. Well, labor shortages hit ATI really hard. Visit projections were not being met yet were being shown, you know, on a quarterly basis. They just were not meeting those visit targets. Unfortunately, the company was burning cash instead of generating returns. So, their stock tanked and that got and they got hammered by analysts. And by 2024, they were sitting with over $500 million in debt with limited flexibility.
And it became crystal clear that the public market was hurting ATI more than it was helping them, which was why they originally made the decision. Let's go back to that decision. When ATI went public in 2020 2021 via a spa, they weren't alone. 2020 and 2021 saw a flood of health care companies taking that same path. And it bodess a little bit of time making sure we're all understanding how these spaxs work, but it stands for specialurpose acquisition company. And it's essentially a shell company that raises money from investors through an IPO with the sole purpose of acquiring a private company and then allowing that company to go public without going through the traditional IPO process which is brutal.
So it's like creating a nest for others to then for companies to come in and rest in and get into the public market. Well, unfortunately, many companies using this vehicle were pushed to the public markets too early, and these deals have been built on more hope as opposed to proven financials. And when results are missed in the public market, the market reacts viciously. And ATI got caught right in that storm. So, you know, it was a little bit of a reality check, unfortunately. And quarter after quarter, ATI failed to meet its projections.
They were spending heavily on travel therapists and other contract staff. They faced major turnover and had very little margin flexibility. Lawsuits started piling up from investors and Wall Street essentially wrote them off as another overhyped spacks story. And this all made future capital raises and investor trust in the outpatient rehabilitation industry extremely difficult. So this decision to go private, you know, by mid 2025, there were two private equity companies called Nighthead Capital and Marathon Asset Management that already owned a large majority of the voting shares of ATI.
So what they did to take the public company private is they bought the rest of those shares at $2.85 and that essentially took the company private. It was, you know, a strategic reset. So there's now will be no more quarterly earnings calls, no more Wall Street pressure. You know, the nice thing for ATI is they now can begin to think long term. And I believe that is exactly what ATI needs to stabilize and then get back in the growth game again. Now, our team continues to look at this and say, in order for this to be successful, you got to fix the balance sheet.
And I think this is this is the key. So, the key move and most important for Nighthead and Marathon to be successful is they now have the ability to convert debt holdings into equity. This will make that shift in the balance sheet and it's not going to be easy but they will not have the typical public company pressure of shareholder approvals dilution issues etc. So they likely acquired this debt at a very large discount and now they're trying one by one to wipe out liabilities issuing themselves equity in return.
And if they're going to be able to pull this off, you know, or they're able to pull this off, this is going to dramatically improve ATI's balance sheet and overall financial health. This will free up some cash flow to once again enable growth for ATI. How does this debt to equity conversion actually work? Well, I'll quickly walk through the mechanics. Sponsors like Nighthead and Marathon buy ATI debt at a discount. Let's call it 60 cents on the dollar. Then they can cancel that debt, receiving new equity in the company instead.
No cash actually exchanges hands, but ATI's books become cleaner as this process goes on, and they no longer have to make these enormous interest payments. And this is kind of the quiet behind the scenes restructuring that is only private, I'm sorry, that is only possible now that they're private. So what's ATI's path now going forward with the balance sheet fixed? All right. And that's a big, you know, you guess it's an if. If the balance sheet gets fixed, ATI will likely return, and they have discussed this in some of the press releases, to somewhat of a growth mode.
Expect them to begin uncovering startup opportunities again once they fix that balance sheet. Uncovering startup opportunities, seeking out new clinic opportunities, again, denovo opportunities in strong markets where they already have a strong existing referral network. We believe at some point in time they'll also return to the acquisition game, focusing on small to midsize tuckins that really match the current regional density. They're going to be very selective and they're not going to want to take a lot of risk, but at some point as this balance sheet continues to move in a positive direction, we are hoping that they will return and be back in the acquisition game.
That will create some more competitive building bidding as ATI in the past was a very competitive bidder on opportunities. You know, now that ATI is private, they also have the opportunity to do a reset on culture as well as operations. They no longer need to hit those quarterly earnings per share, you know, meetings and projections. They can really focus on making solid investments. You know, they've already said this many times over and I think it's going to have to be proven out through time, but you know, they're talking about clinical quality, retention, and a decentralized leadership.
We all know this is a very local business. Decentralized leadership in our opinion, in my opinion, is the only way to successfully run a large physical therapy business. And we would hope for better stability and more autonomy, you know, from their top performing regions for them moving forward. What are some of the market implications that this will have for the outpatient rehabilitation merger and acquisition? Look, if ATI is able to successfully come back into the market, it's going to add competitive pressure. And that's great news for seller sellers especially those with you know between five and 30 clinics where again as ATI is able to pull out of this debt create more equity able to improve that EBITDA you know those are the size businesses that we think they will be hunting down in markets where they're already successful.
So what about the ripple effect on this? H how will this impact some of the other large in recaps that are out there? Look, I think this has big implications for the larger PE backed groups, some of the recaps that have somewhat stalled in the market due to interest rates, valuation mismatches. I also think some cautiousness from investors making big you know multi- you know million-doll transactions and investments you know but ATI's privatization shows some of those sponsors to still believe in rehab as a longterm value play especially if obviously if they move this positively and that confidence could kind thaw the ice and bring back some of these recap deals to life sometime in late 2024, early 2020 2026 depending upon the the trajectory of ATI and there are certainly other factors out there interest rates etc that are looming but you know ATI becoming successful again I think will have a big impact on large investments companies and large investors making those investments in outpatient rehab.
Final final statement, what's it going to take for ATI to succeed and to actually create this market lift? Look, ATI's take private move is a very bold statement, but now comes the harder part. They're going to have to execute, you know. So, can they streamline operations? Can they get staff at reasonable salaries? Can they retain staff and actually then begin to grow EBITDA deliver sustainable results which is a very crowded and competitive and difficult space right now? Well, look, if they can, it could be a very positive thing for the entire rehab merger and acquisition market.
And it's showing that smart capital, discipline, clinical strength that still wins. If not, it could serve as you know kind of a cautionary tale. But I think we should all be hoping for success for ATI based on all of our desire to have this industry in a positive light from investors. Well, I'm excited to talk to you about this in this, you know, incident in the industry. This is a huge move and if any of you have questions on how this move may impact you and your company, click below and let's talk. I appreciate you all joining us and I look forward to seeing you next time.
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