The recent news that Avendra, a hospitality GPO, was bought by Aramark reignited my interest in GPOs.  GPOs are fascinating for a number of reasons:

  • Banding Together.  GPOs typically exist in industries where the buy side is fragmented and the supply side is concentrated.  GPOs represent the “little guys”: hotels, hospitals, state and local governments, or small corporations.  These companies join GPOs to leverage their collective buying power.   (If a monopoly is a gigantic seller, GPOs seek to create a monopsony! A fun word I never get to use.)
  • Ownership Structure.  Buyers typically own their GPOs (wholly or in part) and the GPO receives administrative fees from suppliers.  See the diagram below which describes the basic business model of most healthcare GPOs.

GPO Payment Flows

 

 

  • Business Model.  Most procurement benchmarking among corporations indicates that procurement organizations cost about 0.6% to 1% of spend.  GPO administrative fees typically run about 1-3% of spend.  Perhaps GPOs can charge a higher percent of spend than corporate procurement groups because GPOs consolidate spend of multiple buyers to theoretically negotiate better prices?  I say “theoretically” because:
    • No one knows how much better GPO prices and terms are than those hospitals can get on their own and
    • GPO fees are always under scrutiny and pressure.  (After all, AmazonBusiness may be coming!)
  • Profitability.  If it costs 0.6 to 1% of spend to operate a procurement group and a GPO charges twice that amount, it will not surprise you that GPOs often have great margins.  As I pointed out in my post about Avendra, that company sported EBITDA margins of about 50%.  Premier, Inc. has a supply chain services segment-essentially a GPO–which posted a 52% EBITDA margin in 2016.

Healthcare GPO Consolidation

Given those gaudy margins, GPOs are being acquired like crazy.  In the healthcare space, what used to be about eight large GPOs is now about four mega-GPOs.  It is hard to keep track of all of the mergers and acquisitions the market, as the companies keep changing names:

Leading Healthcare GPOs

GPOMember Annual Spend Volume
Vizient$100 billion
Premier$50 billion
Healthtrust$30 billion
Intalere $9 billion

For reference, in 2008, the two largest GPOs had just $36 billion and $30 billion in spend respectively.

Non-Healthcare GPO Consolidation

Healthcare GPOs are not the only ones consolidating.  As mentioned above, Aramark purchased Avendra.  Avendra’s members represented about $4 billion in spend and $127 million in revenue.  (There’s that 3% again!)

Perhaps the most interesting company in the GPO market is one that is doing a roll-up of GPOs: Omnia Partners.  Backed by TA Associates, Omnia Partners has already acquired GPOs representing approximately $10 billion in spend:

  • National IPA, a GPO focused on the educational and state and local government market
  • Prime Advantage, focused on mid-market manufacturing, and most recently
  • Corporate United, focused on indirect spend at mid-market and small enterprises

I’m guessing that administrative fees and margins in Omnia’s business are lower than those of healthcare and hospitality GPOs (I’m not sure why!), but Omnia could already be a $100-$200 million revenue company with substantial EBITDA.  Hence the interest from a very smart PE firm.

Look for more news from Omnia as there are plenty of regional and specialized GPOs for them to acquire!

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