Scoop: Heritage starts long-awaited sale process

A sale process for Heritage Provider Network, the risk-taking physician organization focused on Southern California, has finally begun, multiple sources tell Axios.

Why it matters: The market has been waiting years for HPN to sell itself, and a deal could be worth more than $7 billion.

• CEO and founder Richard Merkin, in his 70s, owns and has controlled every aspect of the Marina del Rey-based company for 40-plus years.
• The big question is if today's uncertain deal environment will give him cold feet about calling it quits.

Driving the news: A JPMorgan sale process has kicked off, with materials marketing the business distributed to a select group of large buyout firms.

• Some suitors have already held fireside chats with management, sources say. First-round bid timing isn't set but is generally expected to be in June.
• Targeted funds include those with track records in at-risk/ value-based care, and Medicare and Medicaid experience, one source notes.

By the numbers: HPN produced $633 million of 2021 pro forma adjusted EBITDA but non-adjusted 2021 EBITDA was $490 million; estimated pro forma 2022 EBITDA is $765 million, Axios has learned.

• 2022 estimated revenue is about $4.4 billion, about 86% of which stems from California, followed by smaller footprints in New York and Arizona, sources say.
• Bloomberg wrote in October that HPN was working with an undisclosed bank to explore a potential $9 billion-plus sale, although a process hadn't begun.
• Some sources say they now expect bids to come in around the $7 billion to $7.5 billion zip code, but one source adds, "I've had debates around 'can this get north of $10 billion?'" Another comments, "They'll want $9.5 billion."
• The company encompasses 3,700-plus primary care physicians, 10,000-plus specialists and about 1,700 affiliated facilities.

Between the lines: HPN is a well-performing business with density in Southern California, but everything looks a lot different today than it did last fall.

• Merkin has held so many of the keys for so long, which sources say indicates a buyer would need to install a management team and do a fair amount of corporatization.
• Plus, HPN is complex. It's considered by some the genesis of value-based care and has been disciplined about growing profitably. But it hasn't been proven if its model works outside of California.

What to watch: HPN could serve as a value-based acquisition platform, potentially as an acquirer of companies like Cano Health, P3, CareMax, ChenMed, etc.

• It also could attract strategic investors alongside of PE. Humana, for example, would like at-risk primary care for its Medicare Advantage members, and HPN would give it entry into California.
• UnitedHealth and CVS also could make cases for involvement, though the latter would face regulatory hurdles, sources say.

Heritage didn't return requests for comment. JPM declined to comment.