With the potential to transform the private side of the treatment business, some of the nation’s biggest moneyed players are descending on the industry. So far, these wellheeled investors have been mostly focusing on top-flight marquee properties, with last year’s quick sales of Sierra Tucson - first by Bill O’Donnell and partners to CRC Health Group and then by CRC when it sold itself to Bain Capital -- being a prime example.

It is within this vein that the fabled Meadows, located just a stone’s throw from Sierra Tucson in the Arizona desert, was sold last month to private equity powerhouse American Capital. A relatively rare animal in that it is a publicly traded buyout firm, American Capital is being coy about its plans for future addiction treatment investments, but it admits that The Meadows is unlikely to be its only foray into the chemical dependency and behavioral health arenas.

“We are not investing in The Meadows to stand still,” says Bowen Diehl, a Dallas-based principal at American Capital, who engineered the Meadows purchase for the $3.9 billion market capitalized, Nasdaq-listed buyout firm. “We will definitely be looking at acquisitions opportunistically.” And Diehl and his colleagues certainly appear willing to pony up for the privilege. American Capital paid The Meadows’ investors, led by veteran treatment financier Steve Irwin, $79 million for 88 percent of the 74-bed multi-addiction treatment facility, with management and senior clinicians like CEO Bob Fulton and clinical pioneers Pat and Pia Mellody owning the rest of the company. The transaction values The Meadows at around $90 million, or about $1.2 million per bed. Last May, CRC shelled out $130 million for Sierra Tucson, the largest single sum ever paid for a treatment center, which equated to about $1.4 million per bed.

Steve Irwin, who in 1994 orchestrated the purchase of The Meadows from the Addiction Recovery Corporation, says the returns on his 12 year investment were “very substantial,” refusing to elaborate further, except to say that when he bought the Meadows it was a counter-cyclical play into a market that had been thrown into turmoil by the advent of managed care.

And with the entry of Bain Capital and American Capital into the addiction arena in the last six months, Treatment Magazine has learned that a third player - a giant firm that is among the top five private equity players in the world - is on the verge of entering the addiction treatment and behavioral health markets in a big way. And while the magazine’s source spoke on condition of anonymity and that the name of the private equity firm not be identified, they did say that they had been retained to help identify prime addiction treatment and behavioral health targets for the giant private equity firm. “We will be identifying premier providers, there is no one too big,” said the source. “This applies to addiction facilities as well as psychiatric facilities.” What the two strategies seem to have in common - the huge private equity firm soon to enter the market’s and American Capital’s - is that they are focused principally on premier, industry leading type properties like The Meadows and Sierra Tucson, although both say they are not necessarily ruling out other types of transactions. Says Diehl: “We’ll look at anything, and if it makes sense we’ll pursue a deal.”

Steve Irwin thinks that the acquisition strategies being undertaken by the new private equity entrants will result in a “very substantial increase” in treatment center valuations, but cautions it will likely be only on a “very select basis.” Behind this view is Irwin’s belief that success in the treatment business requires a unique and very particular set of skills. “The treatment business is a very management and talent driven industry,” he said. “The skill sets required for success are complicated. This is certainly not the kind of industry where you just go out and get a recruiter and start a world class treatment center.” Hired Power CEO Nanette Zumwalt would agree, having attempted to start a high-level executive recruitment service for the treatment business: “We just couldn’t make it work,” she said. “We found good demand from the treatment centers, but their just wasn’t enough top talent out there to get any deals done.”

CRC Health Group, founded and led by CEO Barry Karlin, is very clearly the first mover behind the latest wave of acquisition activity in the treatment industry, which saw a far more frenzied period of consolidation in the late 1980s that was led by the highly leveraged transactions of companies like Lutheran General of Chicago’s Parkside and others like CompCare. Since touring his first addiction treatment center in the mid 1990s - The Camp in Northern California- Karlin has acquired over 90 facilities in perhaps about a dozen deals.

He is unsure to what extent the new private equity entrants will change the acquisitions marketplace in the addiction treatment arena. Certainly, Karlin’s monster $720 million deal to sell CRC to private equity powerhouse Bain Capital, announced last fall, had a lot to with the surge in interest the addiction field is now seeing from big moneyed investors. “There were many other private equity players that looked at CRC other than Bain,” said Karlin. “Once people saw how well we were doing, I’m not surprised that they’re now taking a close look at addiction treatment.”

And Karlin is also unsure to what degree there might be investment opportunities for big private equity players. “The Meadows was an unusual transaction, as was Sierra Tucson,” says Karlin. “The larger private equity firms tend to concentrate on acquisitions that will put them in an industry leading position. There just aren’t that many properties left in the treatment business that fit that criteria.”

Karlin has a point. The treatment business is overwhelmingly dominated by small players, with the average inpatient or residential center having only about 40 beds, according to SAMHSA data. These types of properties are rarely of interest to large private equity firms, except perhaps an American Capital, which has already managed to snag a large marquee property like the Meadows around which it could possibly build a collection of high quality assets. For this reason, Karlin says he is not too worried about competition heating up all that much in the treatment center acquisitions market. And Karlin also points out that much of the private side of the business is populated by non-profits, which are a regulatory and legal nightmare for for-profit entities to acquire, with many states requiring that their attorneys general personally sign-off on such deals. For-profit acquisitions of non-profits are rarely pursued and even more rarely approved. Besides, Karlin says he has had plenty of competition in the past in bidding for properties, mostly from individual investors or small to medium sized corporate entities.

So, it would seem for at least the immediate future, if the treatment industry does indeed continue to consolidate, that the action may continue to be dominated by small and medium sized players, CRC included. CRC, although by far the largest treatment provider in the nation, still has revenues that are only “north of $200 million,” a level that barely even makes the radar screens of the nation’s largest financial institutions and investment firms.

And there exists a high level of suspicion and distrust of corporate acquirers among treatment center owners and founders, many of whom entered the business with treatment missions a higher priority than treatment profits. Many were left with bad tastes in their mouths when they were employees of treatment centers that had at one point been taken over by a corporate entity. And virtually everyone who has been in the business for any length of time knows about the last major corporate consolidation of the industry, undertaken in the late 1980s and very early 1990s by entities like Parkside and CompCare. These companies’ highly leveraged financial strategies were exposed as imprudent when managed care hit at the beginning of the last decade, creating more havoc and destruction for the industry than otherwise might have occurred in the wake of the era’s brutal cutbacks.

When the owners of South Florida’s Advanced Recovery Center, ARC, began contemplating a sale last year, they appear to have been most decidedly not interested in a sale to a corporate entity. “We were approached by CRC, but were definitely not interested in selling out to them,” said Cyndy Bourke, co-founder of ARC.

Barry Karlin says that if CRC did approach ARC, it was on an informal basis. But late last year, CRC acquired Wellness Resource Center, which like ARC is located in South Palm Beach County and also specializes in dual diagnosis extended care using a partial hospitalization business model that has been widely adopted in Florida. Integrating the operations of Wellness and ARC, especially the housing component, would no doubt have made good business sense for CRC.

But the kind of investor that ARC ultimately sold out to is of a type that has become ubiquitous on the treatment scene over the last three decades, and is likely to remain so for the foreseeable future.

Having gotten sober at ARC, Chaz Cabela had a warm place in his heart for the facility and believes strongly in its mission. He also has plenty of money, being an heir to the Cabela outdoor outfitter catalogue and retailing fortune. Cabelas Inc, the company his family founded and still controls, is a $1.7 billion NYSE-listed enterprise.

Attracted by the mission of helping other alcoholics and addicts, Cabela knew very little about the treatment business before buying ARC. But like many other treatment investors of his type - the recovering person who initially invests primarily for reasons of the heart - Cabela is now interested in expanding his holdings, this time for reasons of the wallet as much as for those of the heart.

Seeing tremendous growth opportunities, Cabela is interested in acquiring detox and primary care facilities that can act as referral feeders into ARC’s extended care program. He is also contemplating expanding the ARC brand by building a new extended care facility in the Western United States. TJ