It's the Great Health Care Buyout Shuffle

Silhouetted executives in a corporate office

Health care outsourcing companies are bad at doing deals, and private equity firms are their fixer of choice.

Envision Healthcare Corp. on Monday agreed to sell itself to KKR & Co. for $46 a share, or $9.9 billion including debt. The deal caps a more than six-month strategic review and comes just 18 months after Envision combined with AmSurg Corp.

The Envision-AmSurg merger was meant to create a health care-services behemoth with $8.5 billion in sales and expertise in everything from ambulatory surgery to anesthesiology. And at the time, bulking up seemed like the right strategic move, with Medicare and other payers seeking to incentivize better coordination. But uncertainty over the Affordable Care Act has since weakened patient demand and undermined Envision's ability to capitalize on the revenue synergies that provided most of the financial logic for the AmSurg deal. Hurricanes in Texas and Florida last year didn't help. And Envision was ill-equipped to grapple with both the changing landscape and the deep-rooted organizational work necessary to make a large merger-of-equals succeed.

A ragtag strategy is evident on the company's website, with AmSurg's name living on for an ambulatory surgical division that's carved out from the rest of the company. This February statement from CEO Christopher Holden about the challenges of drafting a 2017 plan for the merged entity is even more telling:

"Because you're not allowed to really talk to one another when you're going through a merger process, the legacy AmSurg and legacy Envision each prepared their pieces and then we stitched those together at the time of the merger and it became the budget that we lived with."

Envision made things harder on itself by continuing to gobble up physician groups across the country even as it was still digesting AmSurg. It's also been accused of sending enormous bills for out-of-network services that come as a surprise for patients who in some cases deliberately sought out hospitals within their insurance networks. These predatory practices led to a class action lawsuit from investors and soured Envision's relationship with UnitedHealth Group Inc., the largest U.S. insurer and at one point a reported possible buyer for all or part of the company. Envision's efforts to change its ways are likely to weigh on sales.

Enter KKR. Reuters had reported HCA Healthcare was interested in acquiring the AmSurg ambulatory-surgery unit, with KKR taking the rest of Envision, effectively dismantling the merger. That KKR instead decided to go it alone suggests Envision had the right idea by consolidating the physician-outsourcing industry, but that it's a strategy best executed away from the glare of the public markets, especially given the billing controversies.

Sky-high charges from air ambulance operators are also getting fresh scrutiny; read more from Bloomberg News here. In that space, KKR earlier this year purchased Envision's American Medical Response unit for $2.4 billion and combined it with a rival health care transportation company it already owned.

Then again, what do private equity firms know? Envision's history is littered with them. It was formed in 2005 when Canadian buyout shop Onex Corp. acquired American Medical Response (yes, the same transportation unit Envision sold to KKR earlier this year) and physician-services provider EmCare from Laidlaw International. Private equity firm Clayton, Dubilier & Rice then acquired the business in 2011 and took the company public in 2013. Onex had reportedly formed a consortium with Clayton Dubilier and Hellman Friedman to bid for Envision this time around.

The end game here may be to merge AmSurg/Envision with Team Health Holdings Inc., which was acquired by Blackstone Group in 2017 for $6.1 billion. Team Health struggled to integrate its own $1.6 billion purchase of IPC Healthcare after spurning advances from AmSurg. Mind you, Blackstone had previously acquired Team Health in 2005 and took it public in 2009, only to dive back in for round two.

It's not clear what long-lasting operational or capital allocation expertise these supposed masters in running companies have instilled at these health care services companies, or what value they'll be able to add this time around beyond the shield of the private market. Can't wait for 2025 when we write about these companies getting broken up again.

—With assistance from Bloomberg Opinion's Max Nisen.

— For more columns from Bloomberg View, visit http://www.bloomberg.com/view.