Median Kliniken, the largest privately owned reha chain in Germany, has been bought by Advent International and London based private equity backed real estate investor Marcol. Advent plans to add other rehabilitation clinics and even to start buying into the acute sector, although the deal, which covers 27 clinics, does not include all of Median’s units.

Reha has long been seen as a sector in decline as insurers and the state have pulled back from paying for 6 week “cures” which were almost a right for every worker to take every five years until 1997. This has now gone and Frank Lowentraut a consultant at Avivre who specializes in the field expects 400 of the 1,100 left to close, with a loss of roughly 80,000 beds.

But Ralf Huep, general manager of Advent in Germany, says other segments of reha are still growing. “Acute hospitals are now incentivised to reduce acute bed stays and so patients are moved more quickly on to reha units.” This, coupled with a rise in the retirement age from 65 to 67, has led to more demand for reha clinics which cater for patients who have just had, for example, orthopaedic (hip and knee replacements) operations or who have cardio conditions (strokes). He reckons this sector continues to grow by 1-2% per annum. No numbers have been revealed, but he says Median, which has around 6,000 beds is profitable. Observers say that Median’s owners have been left with a rump of 6-7 clinics in spa towns.

Huep says the reha sector remains very fragmented with a couple of hundred groups active. Advent is not alone in moving into the reha sector. In May 2009, Asklepios, the big acute hospital chain mystified analysts by doubling its stake in the other large reha chain publicly quoted Mediclin, taking it to 20.2%. Other large acute hospital chains, such as Helios and Rhoen, also have some reha interests and some reha chains are owned by the big German healthcare insurers who direct their patients to their wholly-owned facilities. Unlike the acute sector, where around 90% of all hospitals are publicly owned or not for profit, reha is dominated by private ownership.

Advent plans to buy extra reha units near large cities which specialise in rehabilitation after acute surgery. It may also buy some acute units and Huep sees the development of consolidated chains of acute and reha units as the way forwards.

Median’s owners Erich Marx and Axel Steinwarz, who set up the business in the 1960s, plan to retire, although Steinwarz will continue to run the units which were not included in the sale. Advent will appoint a new chief executive and finance director once the deal has been approved by Brussels anti-cartel authorities.

Our Analysis: It remains unclear how profitable Median is today. Mediclin, the other large reha group, made an operating profit on its reha division of just €200,000 operating profit on sales of €245.6m in 2008. Advent denies that the exclusion of some of the Median units from the sale reflects “ownership structures” rather than profitability issues and says that the company is “financially sound”.

Advent has done well out of other German healthcare sectors and is a canny operator. It bought Casa Reha, which despite its name is a care home group, in 2003 for an enterprise value of €80m reselling a majority stake to HG Capital in 2007 at a price which valued the enterprise at €330m. Advent still has a 30% stake in Casa.

We suspect that often management of reha units has been dominated by healthcare professionals with little managerial experience so there may be room to tighten up there.