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Universal Health Acquires Foundations Recovery for $350M

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Universal Health Services Inc. (UHS - Free Report) is aggressively taking over facilities to gain a competitive edge in the fast growing behavioral health treatment market. The company recently announced the purchase of privately held Foundations Recovery Network for approximately $350 million after the receipt of FTC approval for the same.

This latest deal follows Universal Health’s August takeover of Alpha Hospitals Holdings Limited – a provider of low and medium secure mental health care facilities and services – in the U.K. Meanwhile, in Feb 2015, the company had bought Orchard Portman House Hospital – a 46-bed behavioral health care facility located near Taunton, U.K.

The Foundations Recovery transaction is expected to help Universal Health expand in the U.S. by adding 322 residential beds across 4 facilities and 8 outpatient centers. The company further plans to set up 140 beds in the near future.

Foundations Recovery is a well known provider of addiction and mental health treatment for both residential and outpatient settings. The company will operate as the substance abuse treatment division under Universal Health.

The growing cases of addiction and mental health disorders in the U.S. present a significant opportunity for providers of behavioral health facilities. Moreover, new laws (2008 Mental Health Parity and Addiction Equity Act as well as Obamacare) have raised the insurance coverage for such patients, which is a major positive for companies like Universal Health.

Apart from Universal Health, players like HEALTHSOUTH Corp are also forging ahead with expansion plans. The company spent $730 million to buy Reliant Hospital Partners in June this year. Also, more recently, Molina Healthcare (MOH - Free Report) announced plans to acquire two behavioral health subsidiaries of Providence Service Corporation for approximately $200 million.

In such a scenario, we expect Universal Health to continue to pursue acquisitions that will help it to gain better traction in the U.S. as well as international markets.

Apart from acquisitions, Universal Health is also expected to significantly benefit from the favorable Obamacare ruling passed in late June. A higher insured customer base will not only lower charity care and bad debts but also increase admission rates owing to improving affordability among patients.

Meanwhile, in the first six months of fiscal 2015, the company’s net revenues increased 13% to $4.50 billion, primarily driven by an 8% increase in net revenues from acute care hospital and behavioral health care services, on a same facility basis. Meanwhile, net revenue per adjusted admission increased 4.6% on a year-over-year basis.

Zacks Rank & Key Pick

Currently, Universal Health sports a Zacks Rank #1 (Strong Buy).

Acadia Healthcare (ACHC - Free Report) is another stock in the same space that carries the same rank as Universal Health.

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