PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 600 Lexington Avenue New York, NY 10022 Tel: (212) 455-7000
Fax: (212) 455-7001
MEMORANDUM
Matter No.: 1001-00001
Date: February 5, 2024
To: Julian Desmond, Co-Founder & Managing Partner, Ardent Capital Management LLC Priya Chandrasekar, Co-Founder & Managing Partner, Ardent Capital Management LLC
From: Howard Bellamy, Partner, Antitrust & Competition Practice Group Monica Reyes, Associate, Antitrust & Competition Practice Group
Re: Preliminary Antitrust Risk Assessment — Acquisition of Pinnacle Health Systems, Inc. by Ardent Capital Partners III LP
PRIVILEGE LEGEND: This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared by Calderwood & Harkness LLP in connection with the above-referenced matter. It is intended solely for the use of the addressees named above and contains legal advice and mental impressions of counsel. This memorandum should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. Any such disclosure may result in a waiver of applicable privileges.
I. Executive Summary
The purpose of this memorandum is to provide Ardent Capital Partners III LP ("Ardent Capital" or the "Fund") with a preliminary assessment of the antitrust risks associated with its proposed acquisition of one hundred percent (100%) of the outstanding equity interests of Pinnacle Health Systems, Inc. ("Pinnacle" or the "Target"). This assessment is based upon information provided to us by Ardent Capital Management LLC (the "Firm"), publicly available information regarding the parties and their competitors, a review of relevant provisions of the Equity Purchase Agreement dated January 31, 2024 (the "EPA"), and our familiarity with current federal antitrust enforcement trends in the healthcare sector.
The Transaction. Ardent Capital, acting through its general partner Ardent Capital GP III LLC, proposes to acquire all outstanding shares of common stock of Pinnacle from Veltrano Equity Holdings LLC (acting through Veltrano Equity Partners Fund V LP), founder and management rollover holders, and minority physician investors. The aggregate enterprise value of the transaction is $952 million. The aggregate equity value is $534 million, consisting of approximately $505.5 million in cash consideration payable to the selling equity holders and approximately $28.5 million in management rollover equity to be retained by Dr. Marcus Ellsworth, Pinnacle's Chief Executive Officer, representing approximately 3.0% of the post-closing equity capitalization of Pinnacle. The EPA was executed on January 31, 2024, and provides for an outside date of June 30, 2024.
Overall Conclusion. Based upon our preliminary analysis, we conclude that the proposed transaction presents low antitrust risk. There are no horizontal overlaps between Pinnacle's operations and any of Ardent Capital's existing healthcare portfolio companies in any relevant product market or geographic market. Pinnacle operates 42 ambulatory surgical centers ("ASCs") and 31 affiliated physician practice management entities across nine states. Ardent Capital's healthcare portfolio consists of Marlowe Asset Management Rehabilitation Holdings LLC ("Marlowe Asset Management Rehab"), an outpatient physical therapy platform operating 74 clinics in Texas, Florida, and Georgia, and Clearpath Diagnostics Inc. ("Clearpath Diagnostics"), an independent clinical laboratory services company operating in Pennsylvania, New Jersey, and New York. Neither of these portfolio companies participates in the same product markets as Pinnacle. Although there is a limited vertical relationship arising from the geographic co-presence of 12 Marlowe Asset Management Rehab physical therapy clinics and certain Pinnacle ASCs in Texas, Florida, and Georgia, this vertical relationship is competitively insignificant for reasons discussed in detail below.
HSR Filing Requirement. The transaction is subject to the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). Both the acquiring person and the acquired person are required to file HSR Notification and Report Forms with the Federal Trade Commission (the "FTC") and the Antitrust Division of the U.S. Department of Justice (the "DOJ"). We recommend that both filings be submitted on February 16, 2024, which is well within the EPA's contractual filing deadline of February 22, 2024 (15 business days from EPA execution, as required by EPA §5.4(a)). We intend to request early termination of the initial 30-day statutory waiting period contemporaneously with filing. Based upon our assessment of the competitive landscape and the absence of any horizontal overlaps, we expect strong prospects for early termination of the HSR waiting period without the issuance of a Second Request for Additional Information and Documentary Material.
II. Transaction Overview
A. Parties to the Transaction
1. Acquiring Person / Ultimate Parent Entity
The acquiring entity for purposes of the transaction is Ardent Capital Partners III LP, a Delaware limited partnership (EIN 87-3421098), which is the investment fund vehicle through which the acquisition will be consummated. Ardent Capital Partners III LP is managed by its general partner, Ardent Capital GP III LLC, a Delaware limited liability company (EIN 86-2198403). Ardent Capital GP III LLC is, in turn, a wholly owned subsidiary of Ardent Capital Management LLC, a Delaware limited liability company (EIN 84-5567312; SEC File No. 801-119247), which serves as the registered investment adviser and fund manager for the Ardent Capital family of funds.
For purposes of the HSR Act, the Ultimate Parent Entity ("UPE") is Ardent Capital Management LLC, as the entity that ultimately controls the acquiring fund through the general partner chain. This determination follows established FTC guidance regarding the identification of UPEs in the private equity fund context, where the management company that controls the general partner of the acquiring fund is treated as the UPE for filing purposes. This determination will be confirmed in the notification form, and we note that this approach is consistent with our prior filings on behalf of Ardent Capital in connection with Fund II transactions.
Ardent Capital Management LLC maintains its principal offices at 399 Park Avenue, 41st Floor, New York, New York 10022. Ardent Capital is a middle-market private equity firm focused on three core sectors: healthcare services, business services, and specialty industrials. Fund III (Ardent Capital Partners III LP) closed in November 2021 with $4.8 billion in aggregate committed capital from institutional limited partners. Across all funds (Funds I through III), the firm has completed 23 platform acquisitions and over 60 add-on acquisitions. The firm's healthcare services portfolio currently consists of two platform investments: Marlowe Asset Management Rehabilitation Holdings LLC and Clearpath Diagnostics Inc., each of which is discussed in greater detail in Sections IV, V, and VI below.
The Co-Founders and Managing Partners of Ardent Capital Management LLC are Julian Desmond and Priya Chandrasekar. Mr. Desmond and Ms. Chandrasekar do not individually constitute separate UPEs for HSR filing purposes, as they exercise control over the acquiring fund solely through their positions at Ardent Capital Management LLC.
2. Acquired Person / Target
The target entity is Pinnacle Health Systems, Inc., a Delaware corporation (EIN 56-4389201), headquartered at 2200 Lakeshore Boulevard, Suite 500, Charlotte, North Carolina 28202. Pinnacle was founded in 2009 by Dr. Marcus Ellsworth, a board-certified orthopedic surgeon, who continues to serve as the company's Chief Executive Officer. Sandra Trevino serves as Pinnacle's Chief Financial Officer.
Pinnacle is a leading operator of multi-specialty ambulatory surgical centers and affiliated physician practice management entities in the southeastern and south-central United States. As of the date of this memorandum, Pinnacle operates a total of 42 ASCs and 31 affiliated physician practice management entities across nine states: North Carolina, South Carolina, Virginia, Tennessee, Georgia, Florida, Alabama, Ohio, and Texas. Pinnacle employs approximately 4,700 individuals, including administrative and clinical staff, across its operating footprint.
For NAICS classification purposes, Pinnacle's operations are classified under NAICS Code 621493 (Freestanding Ambulatory Surgical and Emergency Centers) with respect to its ASC facilities, and NAICS Code 621111 (Offices of Physicians) with respect to its affiliated physician practice management entities.
3. Selling Sponsor
The selling sponsor is Veltrano Equity Holdings LLC, a Delaware limited liability company (EIN 75-6012389), with its principal office at 1400 Elm Street, Suite 3200, Dallas, Texas 75201. Veltrano Equity Holdings LLC is the management company for the Veltrano Equity Partners family of private equity funds. The sale of Pinnacle is being conducted through Veltrano Equity Partners Fund V LP, a $3.2 billion fund. Theodore "Ted" Hargrove serves as Managing Member and Senior Partner of Veltrano Equity Holdings LLC.
Veltrano originally acquired Pinnacle in 2017 for an enterprise value of approximately $340 million. During the approximately seven-year holding period, Veltrano funded a total of 19 add-on acquisitions, expanding Pinnacle's ASC and physician practice management footprint from its original North Carolina and South Carolina base into seven additional states. The proposed transaction to Ardent Capital represents Veltrano's exit from its Pinnacle investment.
4. Pre-Transaction Ownership of Pinnacle
The pre-transaction ownership of Pinnacle Health Systems, Inc. is as follows:
All holders will sell their equity interests in the transaction, with the exception of Dr. Marcus Ellsworth, who will roll over approximately $28.5 million of equity into the post-closing capital structure of Pinnacle, representing approximately 3.0% of the post-closing equity.
B. Transaction Structure and Consideration
The proposed transaction is structured as a 100% equity acquisition in the form of a stock purchase. Ardent Capital Partners III LP (or a newly formed acquisition subsidiary) will acquire all outstanding shares of common stock of Pinnacle Health Systems, Inc. from the selling equity holders pursuant to the EPA.
The key financial terms of the transaction are summarized below:
The enterprise value of $952 million was derived from an EV/EBITDA multiple of approximately 9.7x, based on Pinnacle's FY2023 adjusted EBITDA of $98.2 million as reported in the quality of earnings report prepared by Apex Advisory Group LLC. Revenue and financial statement data are based on the audited financial statements prepared by Harland & Marsh CPAs LLP for Pinnacle's fiscal year ended December 31, 2023.
C. Financing Structure
The acquisition will be financed through a combination of equity contributed by Fund III and committed debt financing. The debt financing structure is as follows:
Total funded debt at closing is estimated at approximately $505 million ($410 million Term Loan B plus $95 million Second Lien Term Loan), with the $55 million revolving credit facility available but expected to remain undrawn at close. Net debt at closing is estimated at approximately $418 million after customary transaction adjustments, including estimated cash-on-hand at closing. Commitment letters for each of the foregoing facilities have been executed and are attached as exhibits to the EPA.
D. Key Transaction Advisors
The principal advisors engaged in connection with the transaction are as follows:
III. HSR Act Filing Requirement Analysis
A. Applicability of the HSR Act
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, 15 U.S.C. § 18a, and the rules promulgated thereunder by the FTC (16 C.F.R. §§ 801–803), require that parties to certain mergers, acquisitions, and other transactions notify both the FTC and the Antitrust Division of the DOJ prior to consummation, and observe a statutory waiting period during which the agencies may review the competitive effects of the proposed transaction. The notification obligation applies to acquisitions of voting securities, assets, or non-corporate interests that satisfy certain jurisdictional thresholds, including size-of-transaction and, in certain cases, size-of-person requirements.
The proposed acquisition of 100% of the outstanding equity of Pinnacle Health Systems, Inc. by Ardent Capital Partners III LP constitutes an acquisition of voting securities within the meaning of the HSR Act. Both the acquiring person (filing through Ardent Capital Management LLC as UPE) and the acquired person (Pinnacle Health Systems, Inc.) are required to file HSR Notification and Report Forms and observe the statutory waiting period before the transaction may be consummated.
B. Size-of-Transaction Test (2024 Thresholds)
Effective as of January 25, 2024, the FTC has revised the HSR Act jurisdictional thresholds for fiscal year 2024. The 2024 size-of-transaction threshold is $111.4 million. A transaction is subject to the HSR Act's notification requirement if, as a result of the transaction, the acquiring person will hold voting securities, assets, or non-corporate interests of the acquired person valued in excess of $111.4 million.
In this case, the aggregate transaction value of the proposed acquisition is $952 million (enterprise value), which substantially exceeds the $111.4 million threshold. Accordingly, the size-of-transaction test is satisfied.
C. Size-of-Person Test (2024 Thresholds)
Under the 2024 thresholds, transactions valued at more than $111.4 million but not more than $445.5 million are subject to an additional size-of-person test, which requires that one party to the transaction have total assets or annual net sales of at least $222.7 million and the other party have total assets or annual net sales of at least $22.3 million. However, for transactions valued in excess of $445.5 million, the size-of-person test does not apply, and the filing obligation exists regardless of the size of the parties.
Because the transaction value of $952 million exceeds the $445.5 million threshold above which the size-of-person test is not required, the HSR filing obligation exists irrespective of the parties' sizes. Nevertheless, for the sake of completeness and to confirm the robustness of our jurisdictional analysis, we note that both parties independently satisfy the size-of-person test:
Acquiring Person (Ardent Capital Management LLC as UPE): The total assets under management of Ardent Capital Partners III LP include $4.8 billion in committed capital, which far exceeds the $22.3 million minimum threshold and the $222.7 million higher threshold. The size-of-person test is satisfied with respect to the acquiring person.
Acquired Person (Pinnacle Health Systems, Inc.): Pinnacle reported annual net sales (revenue) of $637.4 million and total assets of approximately $812 million for its fiscal year ended December 31, 2023. Both figures exceed the $22.3 million minimum threshold and the $222.7 million higher threshold. The size-of-person test is satisfied with respect to the acquired person.
D. Filing Fee Determination
The Merger Filing Fee Modernization Act of 2022, which became effective in fiscal year 2024, established a revised, tiered fee schedule for HSR filings based on the aggregate total value of the transaction. Under the 2024 fee schedule, the filing fee tiers are as follows:
The transaction value of $952 million falls within the $500 million to less than $1 billion tier. Accordingly, the applicable filing fee is $280,000. Under the HSR Act, only one filing fee is required per transaction (paid by the acquiring person). Pursuant to EPA §5.4(a), the filing fee is to be borne by Ardent Capital.
E. Filing Timeline and EPA Obligations
The EPA imposes specific obligations on the parties with respect to HSR filing and the antitrust clearance process. The key provisions are summarized below and are discussed in greater detail in Section XI of this memorandum.
Filing Deadline. EPA §5.4(a) requires each of the parties to file its respective HSR Notification and Report Form within 15 business days of the execution of the EPA. The EPA was executed on January 31, 2024. Accordingly, the contractual filing deadline is February 22, 2024 (15 business days from January 31, 2024, calculated in accordance with the FTC's business day counting rules).
Target Filing Date. We recommend that both the acquiring person and acquired person filings be submitted on February 16, 2024. This target date allows adequate time for preparation of the notification forms, completion of Item 4(c) and 4(d) document collection, and coordination with target's antitrust counsel, while still filing comfortably ahead of the contractual deadline.
Waiting Period. The initial 30-day statutory waiting period will commence upon filing and will expire 30 calendar days thereafter. If both filings are submitted on February 16, 2024, the initial waiting period will expire on March 17, 2024 (absent early termination or the issuance of a Second Request extending the waiting period).
Early Termination. We intend to request early termination of the waiting period simultaneously with the submission of both filings. If the agencies grant early termination, the waiting period will terminate prior to its natural expiration date, enabling the parties to proceed to closing more expeditiously. We note that the FTC resumed its practice of granting early termination in February 2023 after a hiatus that began in February 2021, and early termination grants in non-overlapping healthcare PE transactions have been issued with regularity in recent months.
Conditions to Closing. EPA §6.1(c) provides that the expiration or early termination of the HSR waiting period (including any extensions thereof) is a mutual condition to the obligation of both parties to consummate the transaction. Neither party is obligated to close until this condition is satisfied.
Termination Rights. EPA §7.1(b)(ii) provides that either party may terminate the EPA if HSR clearance has not been obtained by the outside date of June 30, 2024. Given our low-risk assessment, we do not anticipate that the antitrust review will approach the outside date.
Efforts Obligation. EPA §5.4(c) requires Ardent Capital to use "reasonable best efforts" to obtain HSR clearance, but expressly provides that Ardent Capital has no obligation to accept any divestiture, hold-separate order, or behavioral remedy as a condition to obtaining clearance. This is a favorable "no-divestiture" formulation for Ardent Capital and is consistent with market-standard provisions for healthcare PE acquisitions where the antitrust risk is assessed as low.
Reverse Termination Fee. EPA §7.3(b) provides for a reverse termination fee of $28.56 million (calculated as 3.0% of the $952 million enterprise value), payable by Ardent Capital to Veltrano Equity Holdings LLC in the event that the transaction fails to close due to an antitrust regulatory block (i.e., failure to obtain HSR clearance or the issuance of a governmental order prohibiting consummation). Given our assessment that the probability of a Second Request is very low and that there are no substantive antitrust concerns, we do not expect this reverse termination fee provision to be triggered.
IV. Identification of Relevant Product Markets
A threshold step in any merger antitrust analysis is the identification of the relevant product markets in which the merging parties participate. The relevant product market defines the arena of competition within which the competitive effects of the transaction are assessed. The standard methodology for product market definition, as articulated in the DOJ and FTC Merger Guidelines, is the hypothetical monopolist test: a relevant product market is the smallest group of products such that a hypothetical monopolist could profitably impose a small but significant and non-transitory increase in price ("SSNIP").
For purposes of this preliminary assessment, we have identified the following product markets relevant to the transaction.
A. Ambulatory Surgical Center Services (Multi-Specialty)
Pinnacle operates 42 ambulatory surgical centers providing a range of outpatient surgical procedures across multiple clinical specialties, including orthopedics, gastroenterology, ophthalmology, pain management, and ear/nose/throat procedures. ASCs are Medicare-certified, state-licensed surgical facilities that provide scheduled outpatient surgical procedures in an environment that does not require an overnight hospital stay.
Ambulatory surgical center services constitute a recognized distinct product market in FTC merger analysis, separate from inpatient hospital surgical services. The FTC and federal courts have consistently treated ASCs as competing in a product market distinct from hospital-based surgical services because ASCs provide a specific set of lower-acuity, outpatient surgical procedures at materially lower cost than hospital-based outpatient departments, and because ASCs operate under a different regulatory and reimbursement framework. Patients who are candidates for ASC procedures generally cannot substitute inpatient hospital surgical services on a one-for-one basis due to differences in cost, insurance coverage, scheduling, and clinical appropriateness, and vice versa. For these reasons, we define ASC services as a separate relevant product market for purposes of this analysis.
The applicable NAICS Code for Pinnacle's ASC operations is 621493 (Freestanding Ambulatory Surgical and Emergency Centers).
B. Physician Practice Management Services
In addition to its ASC operations, Pinnacle operates 31 affiliated physician practice management entities across the specialties of orthopedics, gastroenterology, and ophthalmology. These practice management entities provide administrative, operational, and management services to physician practices, including revenue cycle management, practice operations, human resources, marketing, and compliance support. The physicians affiliated with Pinnacle's practice management entities generate patient referrals and surgical case volume for Pinnacle's ASC facilities.
Physician practice management services may constitute a separate relevant product market, or may be analyzed as part of the broader physician services market. The FTC has not established a definitive product market definition for physician practice management services as distinct from the underlying physician services themselves. For purposes of this preliminary assessment, we treat physician practice management as a potentially separate product market, recognizing that these services are distinct from ASC facility services but are vertically related to them insofar as physician practices generate referrals and case volume for ASCs.
The applicable NAICS Code for Pinnacle's physician practice management operations is 621111 (Offices of Physicians).
C. Ardent Capital Portfolio Company Services
To identify potential horizontal overlaps, we have analyzed the product markets in which each of Ardent Capital's existing healthcare portfolio companies participates.
Marlowe Asset Management Rehabilitation Holdings LLC. Marlowe Asset Management Rehab operates 74 outpatient physical therapy clinics providing physical therapy, occupational therapy, and related rehabilitation services. Outpatient physical therapy services constitute a distinct product market from both ASC surgical services and physician practice management services. Patients receiving physical therapy are typically referred for post-surgical rehabilitation or for non-surgical treatment of musculoskeletal conditions. Physical therapy services are reimbursed under separate billing codes (CPT codes in the 97000 series) and are subject to distinct payor contracting arrangements. There is no reasonable basis for including physical therapy services and ASC surgical services within the same relevant product market.
Clearpath Diagnostics Inc. Clearpath Diagnostics provides independent clinical laboratory testing services, including routine blood work, urinalysis, pathology, and specialized diagnostic testing. Independent clinical laboratory testing services are a well-established, separate product market that is distinct from both ASC services and physician practice management services. The FTC has treated clinical laboratory services as a distinct product market in multiple prior merger investigations and enforcement actions.
Preliminary Product Market Conclusion. Neither Marlowe Asset Management Rehab nor Clearpath Diagnostics operates in the same product markets as Pinnacle. There is no horizontal overlap at the product market level between the Target and any existing Ardent Capital portfolio company. The acquisition of Pinnacle will not combine competing operations in any relevant product market.
V. Identification of Relevant Geographic Markets
A. Pinnacle's Geographic Footprint
Pinnacle currently operates across nine states: North Carolina, South Carolina, Virginia, Tennessee, Georgia, Florida, Alabama, Ohio, and Texas. Within each state, Pinnacle's operations are concentrated in specific metropolitan areas.
For ASC services and physician practice management, relevant geographic markets are typically defined at the metropolitan statistical area ("MSA") level, reflecting the local nature of patient demand for outpatient surgical and physician services. Patients generally select ASC facilities and physician practices based on proximity to their homes or workplaces, and rarely travel more than 30 to 45 minutes for routine outpatient procedures. The FTC has consistently defined relevant geographic markets for ASC and physician services at the MSA or county level, depending on the specific facts of each case.
Based upon our review of Pinnacle's facility locations and the applicable census-defined MSAs, we have identified the following nine metropolitan statistical areas for purposes of this analysis:
These nine MSAs account for all of Pinnacle's operating locations. Pinnacle's geographic concentration is heaviest in the Charlotte-Concord-Gastonia MSA, which serves as the company's home market and contains 14 of its 42 ASCs. The remaining MSAs represent expansion markets entered through Pinnacle's add-on acquisition program under Veltrano's ownership.
B. Ardent Capital Portfolio Company Geographic Footprints
Marlowe Asset Management Rehabilitation Holdings LLC. Marlowe Asset Management Rehab operates 74 outpatient physical therapy clinics in three states: Texas, Florida, and Georgia. Its headquarters are located at 8950 Westheimer Road, Suite 600, Houston, Texas 77063. Within these three states, Marlowe Asset Management Rehab's clinic locations are distributed across multiple MSAs, with concentrations in the Houston, Dallas-Fort Worth, Tampa-St. Petersburg, and Atlanta metropolitan areas.
The geographic overlap states between Marlowe Asset Management Rehab and Pinnacle are Texas, Florida, and Georgia — three of Pinnacle's nine operating states. However, as discussed in Section IV above, Marlowe Asset Management Rehab operates in a distinct product market (outpatient physical therapy services) from Pinnacle's operations (ASC services and physician practice management). Therefore, the geographic co-presence of Marlowe Asset Management Rehab and Pinnacle in these three states does not create a horizontal competitive overlap. The competitive significance of this geographic co-presence is limited to a potential vertical relationship, which is discussed in Section VII below.
We note specifically that 12 Marlowe Asset Management Rehab clinic locations are co-located with or situated in close proximity to Pinnacle ASCs in Texas, Florida, and Georgia. These co-located facilities raise a vertical relationship question — namely, whether post-acquisition common ownership could facilitate referral steering between Pinnacle ASCs and Marlowe Asset Management Rehab physical therapy clinics — which is addressed in Section VII.
Clearpath Diagnostics Inc. Clearpath Diagnostics operates independent clinical laboratory facilities in Pennsylvania, New Jersey, and New York, and generated approximately $218 million in revenue for its most recent fiscal year. Clearpath's headquarters are located at 1700 Market Street, Suite 3400, Philadelphia, Pennsylvania 19103. Clearpath has no geographic overlap with any of Pinnacle's nine operating states. There is no geographic co-presence between Clearpath Diagnostics and Pinnacle in any MSA or state. No further geographic analysis is required with respect to Clearpath Diagnostics.
C. Preliminary Geographic Market Conclusion
Ardent Capital, through its existing portfolio companies, has no presence in any of the nine identified MSAs in the same product markets as Pinnacle. There is no horizontal geographic overlap in ASC services, physician practice management, or any other product market. The sole geographic co-presence involves Marlowe Asset Management Rehab's physical therapy clinics and Pinnacle's ASCs in three states (Texas, Florida, and Georgia), which involves distinct product markets and is therefore not a horizontal overlap.
VI. Horizontal Overlap Analysis
The core question in any merger antitrust review is whether the transaction will substantially lessen competition in a relevant market by combining competing firms. This analysis examines whether the acquiring person and the target currently compete, or could reasonably be expected to compete, in any relevant product and geographic market.
A. ASC Services
Ardent Capital does not currently own, operate, or manage any ambulatory surgical centers in any state or metropolitan area, either through its portfolio companies or otherwise. Accordingly, the proposed acquisition of Pinnacle's 42 ASCs will not combine any competing ASC operations. There is zero horizontal overlap in ASC services in any of the nine MSAs identified in Section V above.
Because Ardent Capital has no existing presence in the ASC services market in any geography, post-transaction market concentration (as measured by the Herfindahl-Hirschman Index, or "HHI") will not change in any MSA as a result of this acquisition. The transaction is, from an ASC perspective, entirely a new-entry transaction by a financial sponsor that has not previously invested in the ASC sector.
To illustrate this point, we provide the following data for the Charlotte-Concord-Gastonia, NC-SC MSA, which is Pinnacle's largest market:
•  Pinnacle operates 14 of approximately 67 ASCs in the Charlotte MSA, representing an approximate facility share of 20.9% and an estimated net patient revenue share of approximately 18.3%.
•  Other significant ASC operators in the Charlotte MSA include Ashford Industries (17 ASCs), Ridgeway Corporation (8 ASCs), and several independent physician-owned ASCs.
•  The pre-transaction HHI for the Charlotte MSA ASC market is estimated at approximately 1,280 (a moderately concentrated market under the Merger Guidelines framework).
•  The post-transaction HHI is approximately 1,280 — identical to the pre-transaction HHI — because Ardent Capital has no pre-existing ASC presence in the Charlotte MSA and therefore the acquisition does not combine any competing facilities.
•  The change in HHI ("delta") is zero.
A full HHI analysis for all nine MSAs is currently being prepared and will be presented in a separate analytical workpaper to be circulated within the next several business days. We anticipate that the results will be consistent across all nine MSAs — i.e., zero change in HHI in every market.
B. Physician Practice Management Services
Ardent Capital does not currently own or operate any physician practice management entities in any specialty or geographic market. The acquisition of Pinnacle's 31 affiliated physician practice management entities will not combine any competing practice management operations. There is zero horizontal overlap in physician practice management in any MSA.
C. Physical Therapy Services
Marlowe Asset Management Rehab operates outpatient physical therapy clinics in Texas, Florida, and Georgia — the same states in which some of Pinnacle's operations are located. However, Pinnacle does not operate outpatient physical therapy clinics or provide physical therapy services. The fact that both Marlowe Asset Management Rehab and Pinnacle are present in overlapping states is not relevant to the horizontal overlap analysis, because the two companies participate in distinct product markets. There is no horizontal overlap in physical therapy services.
D. Clinical Laboratory Services
Clearpath Diagnostics provides independent clinical laboratory testing services in Pennsylvania, New Jersey, and New York. Pinnacle does not operate clinical laboratories or provide clinical laboratory testing services. Moreover, there is no geographic overlap between Clearpath Diagnostics and Pinnacle, as Clearpath operates exclusively in the Mid-Atlantic and Northeast regions, while Pinnacle operates exclusively in the Southeast, South-Central, and Midwest regions. There is no horizontal overlap in clinical laboratory services, and no geographic overlap of any kind between Clearpath Diagnostics and Pinnacle.
E. Overall Horizontal Overlap Conclusion
Based upon our analysis of all relevant product markets and geographic markets, we conclude that no horizontal overlaps exist between Pinnacle Health Systems, Inc. and any Ardent Capital portfolio company. The proposed acquisition is a clean private equity platform acquisition by a financial sponsor that does not currently participate in any of Pinnacle's product markets. The transaction will not result in any competitive combination effects, and post-transaction market concentration will be unchanged in every relevant market.
This conclusion is the single most significant factor supporting our overall assessment that the transaction presents low antitrust risk and is likely to receive early termination of the HSR waiting period.
VII. Vertical Relationships Analysis
Although the proposed transaction does not present any horizontal competitive overlaps, antitrust enforcers also examine whether a transaction may create or enhance vertical relationships that could harm competition through foreclosure, raising rivals' costs, or facilitating anticompetitive coordination. We have identified one potential vertical relationship arising from the transaction, which we analyze below.
A. Referral Relationship Between Marlowe Asset Management Rehab and Pinnacle ASCs
As noted in Section V.B above, 12 Marlowe Asset Management Rehabilitation Holdings LLC physical therapy clinic locations are co-located with or situated in close geographic proximity to Pinnacle ASC facilities in Texas, Florida, and Georgia. Following the consummation of the proposed acquisition, Ardent Capital will control both the Marlowe Asset Management Rehab physical therapy clinics and the Pinnacle ASCs under common ownership. This common ownership creates a potential vertical relationship in two directions:
(i) Downstream referrals: Patients undergoing surgical procedures at Pinnacle ASCs may be referred to Marlowe Asset Management Rehab clinics for post-surgical physical therapy and rehabilitation services, rather than to competing physical therapy providers.
(ii) upstream referrals: Physical therapy patients at Marlowe Asset Management Rehab clinics who are identified as candidates for surgical intervention may be referred to Pinnacle ASCs for surgical procedures, rather than to competing ASCs or hospital-based surgical programs.
Preliminary Assessment. We have conducted a preliminary assessment of the competitive significance of this vertical referral relationship and conclude that it is competitively insignificant for the following reasons:
First, physical therapy referrals are subject to meaningful constraints, including patient choice and payor network requirements. Patients receiving post-surgical rehabilitation services retain the right to select their physical therapy provider, and many health insurance plans maintain restrictive provider networks that constrain referral patterns independent of any physician or facility preference. A patient's choice of physical therapy provider is influenced by factors including geographic convenience, insurance network participation, prior provider relationships, and personal preferences — factors that substantially limit the ability of any ASC operator to systematically steer post-surgical referrals to an affiliated PT provider.
Second, post-surgical physical therapy referrals from ASCs represent a relatively small fraction of the total referral volume for physical therapy services in any geographic market. Physical therapy clinics derive referrals from a wide range of sources, including primary care physicians, orthopedic specialists (many of whom are not affiliated with Pinnacle), sports medicine providers, workers' compensation programs, and self-referrals in states that permit direct access. ASC-originated referrals are only one channel among many, and even a complete capture of post-surgical referrals from 12 Pinnacle ASCs would represent a modest share of the total physical therapy market in the affected MSAs.
Third, no exclusive referral arrangements between Pinnacle ASCs and Marlowe Asset Management Rehab clinics are contemplated as part of the transaction, nor would such arrangements be permissible under applicable healthcare regulatory requirements. The federal physician self-referral statute (the Stark Law, 42 U.S.C. § 1395nn) and the Anti-Kickback Statute (42 U.S.C. § 1320a-7b) impose significant constraints on referral steering in the healthcare industry. These federal laws independently limit the ability of commonly owned healthcare facilities to engage in the type of referral steering that would be necessary to create a competitively meaningful foreclosure effect. Compliance with these regulatory requirements — which Pinnacle and Marlowe Asset Management Rehab are independently required to maintain — effectively constrains the vertical relationship.
Fourth, the 12 co-located Marlowe Asset Management Rehab clinics represent a small subset of the broader physical therapy market in each affected MSA. In each of the Texas, Florida, and Georgia MSAs where co-location exists, there are numerous competing physical therapy providers, including national chains (such as Kestrel Enterprises, Drayton Enterprises, and Beaumont Industries), regional multi-site operators, hospital-based outpatient rehabilitation programs, and independent single-site practices. The competitive impact of any referral steering would be diluted across this large and fragmented competitive landscape.
In light of these factors, we assess the vertical relationship between Marlowe Asset Management Rehab and Pinnacle as competitively insignificant and unlikely to attract agency scrutiny. We will provide a more detailed quantitative analysis of referral volumes and foreclosure potential in a separate vertical relationships memorandum, which we expect to complete by February 10, 2024.
B. Clearpath Diagnostics — No Vertical Relationship
Clearpath Diagnostics operates exclusively in Pennsylvania, New Jersey, and New York. It has no geographic overlap with any of Pinnacle's operating states or metropolitan areas. Accordingly, there is no vertical relationship between Clearpath Diagnostics and Pinnacle that warrants analysis. Even if one were to hypothesize a theoretical vertical relationship between clinical laboratory services and ASC operations (e.g., ASCs ordering laboratory tests for pre-operative screening), the complete absence of geographic co-presence renders any such relationship moot. No further analysis of Clearpath Diagnostics is required for purposes of this assessment.
VIII. Potential Second Request Risk Assessment
A. Factors Favoring Early Termination
We have identified multiple factors that strongly support the expectation that this transaction will receive early termination of the HSR waiting period without the issuance of a Second Request for Additional Information and Documentary Material:
1.  No horizontal overlaps. As demonstrated in Section VI above, there are no horizontal overlaps between Pinnacle's operations and any Ardent Capital portfolio company in any relevant product market or geographic market. This is the most critical factor in the Second Request risk calculus. The absence of any competitive overlap means that the transaction will not increase concentration in any market, will not eliminate any direct or potential competitor, and will not create any presumption of competitive harm under the Merger Guidelines framework.
2.  Unchanged market concentration. HHI levels will be unchanged post-transaction in all nine MSAs where Pinnacle operates. The change in HHI attributable to the transaction is zero in every market. This fact alone is dispositive under the structural presumption analysis of the Merger Guidelines.
3.  Sponsor-to-sponsor transaction. The transaction is structured as a straightforward financial sponsor-to-financial sponsor buyout — Veltrano Equity Partners Fund V LP is selling its controlling interest in Pinnacle to Ardent Capital Partners III LP. The change in financial sponsor ownership does not alter the competitive dynamics of any market. Pinnacle will continue to operate as a standalone entity under the same management team, and no integration or combination with any other operating platform is contemplated.
4.  Consistent with market practice. Healthcare services PE acquisitions that do not present horizontal overlaps routinely receive early termination of the HSR waiting period. Our firm has handled numerous HSR filings for non-overlapping healthcare services PE transactions in recent years, and in substantially all such cases, early termination was granted within 15 to 25 days of filing.
5.  De minimis vertical relationship. The vertical relationship between Marlowe Asset Management Rehab's physical therapy clinics and Pinnacle's ASCs is limited in scope and competitively insignificant, as discussed in Section VII above. This type of attenuated vertical relationship in adjacent healthcare services sectors is not the type of relationship that typically attracts agency scrutiny in the merger review context.
B. Factors That Could Attract FTC Attention
While we assess the overall antitrust risk as low, we note the following factors that could, in theory, attract some degree of attention from FTC staff during the initial review:
1.  Heightened FTC focus on healthcare transactions. The FTC under Chair Lina Khan has been generally active in scrutinizing healthcare transactions, including acquisitions by private equity-backed platforms in the healthcare services sector. The FTC has publicly expressed concern about the effects of private equity investment on healthcare costs, quality, and access, and has launched several investigations and enforcement actions targeting PE-backed healthcare consolidation. While these enforcement efforts have been concentrated on transactions involving horizontal overlaps (particularly in hospital and physician practice markets), the general posture of heightened scrutiny is a background factor that we note for completeness.
2.  History of serial acquisitions. Pinnacle has grown through 19 add-on acquisitions during Veltrano's approximately seven-year ownership period. The FTC has expressed concern about "serial acquisition" strategies in healthcare, whereby a platform company achieves market power through a series of individually small acquisitions that may not have individually triggered HSR filing requirements. FTC staff may inquire about Ardent Capital's intended acquisition strategy for Pinnacle post-closing, including whether Ardent Capital plans to pursue additional add-on acquisitions. However, the HSR filing relates to the platform acquisition itself, not to hypothetical future add-on transactions. Any future add-on acquisitions would be independently assessed under the HSR Act and applicable antitrust standards at the time they are proposed, and would be subject to separate HSR notification requirements if the applicable thresholds are met.
3.  Charlotte MSA market share. Pinnacle's market share in its home market of Charlotte is approximately 18–21% (depending on the measure used — facility count versus net patient revenue). While this market share is moderate and well below the levels that would typically trigger competitive concern in a horizontal merger (the Merger Guidelines generally presume competitive harm at market shares above 30% and HHI levels above 2,500), it is possible that FTC staff may take note of Pinnacle's position in the Charlotte market. However, because the proposed transaction does not add any competing ASC operations to Pinnacle's Charlotte presence, the market share is relevant only to the baseline competitive landscape and not to the competitive effects of the transaction itself.
C. Second Request Probability Assessment
Taking into account all of the factors described above — including the complete absence of horizontal overlaps, the unchanged market concentration, the de minimis nature of the vertical relationship, and the straightforward financial sponsor-to-financial sponsor transaction structure — we assess the probability that the FTC or DOJ will issue a Second Request for Additional Information and Documentary Material as very low, at less than five percent (5%).
This assessment reflects our professional judgment based upon our experience with HSR filings in similar transactions, our understanding of current FTC enforcement priorities, and the specific competitive characteristics of this transaction. We note that a very low Second Request risk assessment is not equivalent to a zero-risk assessment; the agencies retain discretion to issue Second Requests for any reason, and there is always some residual risk associated with any HSR filing. However, we believe that the factual record here strongly supports a finding of no competitive concern, and we are confident in our assessment.
We recommend requesting early termination and preparing a voluntary submission in the form of a brief white paper to be submitted directly to the FTC staff. The white paper will summarize the transaction, confirm the absence of horizontal overlaps, and address the limited vertical relationship. Voluntary submissions of this kind are a standard practice in non-problematic transactions and can facilitate an expedited review and early termination grant by providing the reviewing staff with the information needed to close their investigation without the need for follow-up questions or additional document requests.
IX. Item 4(c) and 4(d) Document Collection
A. Scope of Required Production
The HSR Notification and Report Form requires the production of certain categories of documents, most notably those responsive to Items 4(c) and 4(d) of the notification form.
Item 4(c) requires the production of all documents that were prepared by or for any officer(s) or director(s) of the filing person (or, in the case of an unincorporated entity, individuals exercising similar functions) for the purpose of evaluating or analyzing the proposed acquisition with respect to markets, market shares, competition, competitors, potential for sales growth, or expansion into product or geographic markets.
Item 4(d) requires the production of all studies, surveys, analyses, and reports that were prepared by or for any officer(s) or director(s) of the filing person (or, in the case of an unincorporated entity, individuals exercising similar functions) by investment bankers, consultants, or other third-party advisors for the purpose of evaluating or relating to the proposed acquisition.
These document production requirements apply to both the acquiring person and the acquired person filings. Each filing person is responsible for collecting and producing its own responsive documents.
B. Preliminary Document Identification — Acquiring Person
Based on initial discussions with the Ardent Capital deal team, we have identified approximately seven (7) documents that are likely responsive to Items 4(c) and 4(d):
1.  Three (3) confidential information memoranda and/or teaser documents prepared by Crestline Baird & Co. (sell-side financial advisor) and received by Ardent Capital during the initial phase of the sale process. These documents are likely responsive to Item 4(d) as materials prepared by a third-party advisor that relate to the proposed acquisition.
2.  Two (2) internal investment committee memoranda prepared by the Ardent Capital Management LLC deal team for presentation to the Fund III investment committee. These memoranda contain analysis of Pinnacle's market position, competitive dynamics, growth opportunities, and strategic rationale for the acquisition, and are responsive to Item 4(c).
3.  One (1) board presentation prepared for and presented to Ardent Capital GP III LLC in connection with the GP's approval of the transaction. This document contains competitive analysis and market positioning information and is responsive to Item 4(c).
4.  One (1) email chain among members of the Ardent Capital deal team discussing the competitive landscape for ASC services in Pinnacle's operating markets. This email chain contains analysis of competition and competitors and is responsive to Item 4(c).
We emphasize that this preliminary identification is based on initial discussions and has not yet been confirmed through a comprehensive document collection process. We will provide detailed collection instructions to the Ardent Capital deal team under separate cover (letter to follow), including guidance on custodian identification, search methodology, and the scope of responsive documents. We will also conduct a privilege review of all potentially responsive documents to ensure that no privileged attorney-client communications or attorney work product are inadvertently produced in the HSR filing. Any documents prepared by or at the direction of counsel in connection with the antitrust analysis of the proposed transaction are protected by the attorney-client privilege and/or the work product doctrine and will not be produced.
C. Acquired Person Documents
Greenvale Durneval LLP (Jonathan Felder) is responsible for coordinating the acquired person's Item 4(c) and 4(d) document collection on behalf of Pinnacle Health Systems, Inc. and Veltrano Equity Holdings LLC. Based on preliminary communications with Mr. Felder's team, we understand that Pinnacle has identified approximately eleven (11) responsive documents, which we expect will include Crestline Baird & Co.'s sell-side marketing materials, Pinnacle management presentations, and Veltrano internal investment memoranda related to the sale process.
We will coordinate with Greenvale Durneval to ensure consistency across both filings, including alignment on document identification methodology, formatting of the Item 4(c) and 4(d) privilege logs (if applicable), and the treatment of overlapping documents that may be responsive to both the acquiring person and acquired person filings.
X. Coordination with Target's Antitrust Counsel
Greenvale Durneval LLP (Jonathan Felder, Partner) has been engaged as antitrust counsel to Pinnacle Health Systems, Inc. and Veltrano Equity Holdings LLC for purposes of the acquired person HSR filing. Effective coordination between Calderwood & Harkness and Greenvale Durneval is essential to ensure the timely and consistent filing of both HSR notifications and the efficient resolution of any agency inquiries that may arise during the waiting period.
We intend to establish a coordination protocol with Greenvale Durneval that will address the following matters:
1.  Simultaneous filing. Both the acquiring person and acquired person HSR Notification and Report Forms will be filed simultaneously on the target filing date of February 16, 2024. We will coordinate the timing of electronic submission with Greenvale Durneval to ensure that both filings are transmitted to the FTC's premerger notification office on the same business day, which is a prerequisite for the commencement of the statutory waiting period.
2.  Consistency of transaction descriptions. We will coordinate with Greenvale Durneval to ensure that the transaction descriptions contained in each filing are materially consistent with respect to key transaction parameters, including the transaction structure, enterprise value, equity value, sources and uses of financing, and the identities of the parties. Inconsistencies between the acquiring person and acquired person filings can delay agency review and may prompt staff inquiries.
3.  NAICS code classifications. Both filings will utilize consistent NAICS code classifications for Pinnacle's operations: 621493 (Freestanding Ambulatory Surgical and Emergency Centers) for ASC operations and 621111 (Offices of Physicians) for physician practice management operations. We will confirm these classifications with Greenvale Durneval.
4.  Valuation figures. We will ensure that both filings report consistent transaction valuation figures, including enterprise value ($952 million), equity value ($534 million), and other financial metrics reported in the notification forms.
5.  Early termination request. Both the acquiring person and acquired person filings will include a request for early termination of the statutory waiting period. We will coordinate the submission of early termination requests with Greenvale Durneval.
A formal coordination protocol letter will be sent to Greenvale Durneval on or before February 5, 2024, to memorialize these arrangements and establish the procedural framework for the filing process.
XI. Key EPA Antitrust Provisions Summary
We have reviewed the antitrust-related provisions of the Equity Purchase Agreement dated January 31, 2024, and summarize the key provisions below for reference:
Given our assessment that the transaction presents low antitrust risk and that the probability of a Second Request is very low, we do not expect any of the termination provisions or the reverse break fee provision to be triggered. The "no-divestiture" formulation in EPA §5.4(c) is consistent with the parties' understanding that no remedies should be required, but it also provides Ardent Capital with contractual protection in the unlikely event that an agency were to demand structural or behavioral concessions as a condition to clearance.
XII. Regulatory Agency Jurisdiction
Under the HSR Act, the FTC and the Antitrust Division of the DOJ share merger review authority. When an HSR filing is submitted, the two agencies engage in an interagency clearance process to determine which agency will assume primary responsibility for reviewing the transaction. This allocation is based on each agency's historical expertise with the relevant industry sector and the nature of the competitive issues presented.
Healthcare transactions have historically been reviewed by the FTC Bureau of Competition, which has developed substantial expertise in healthcare markets, including hospitals, physician practices, ambulatory surgical centers, pharmaceuticals, and medical devices. The FTC's longstanding jurisdiction over healthcare mergers is well-established, and we are not aware of any recent instance in which a healthcare services transaction was cleared to the DOJ rather than the FTC.
Accordingly, we expect that the FTC will receive interagency clearance for this transaction, consistent with standard practice for healthcare services acquisitions. Our voluntary submission white paper will be directed to the FTC Bureau of Competition, and we will establish contact with the relevant FTC staff attorneys in the healthcare division upon filing.
State Attorney General Considerations. We note that no state attorney general pre-merger filing requirements are triggered by this transaction under the laws of any of Pinnacle's nine operating states. However, certain state attorneys general offices — most notably in North Carolina, Texas, and Florida — have in recent years conducted independent reviews of significant healthcare transactions, sometimes in coordination with the FTC and sometimes on a standalone basis. While we do not expect any state-level antitrust challenge to this transaction, we will monitor for any state AG inquiries or requests for information during the HSR waiting period and will promptly advise the client if any such inquiries are received.
We also note that certain states impose certificate-of-need ("CON") requirements for the establishment or transfer of ownership of healthcare facilities, including ASCs. A separate analysis of state CON requirements applicable to the transfer of Pinnacle's ASC licenses is being prepared as part of the broader regulatory workstream and will be addressed in a separate memorandum. The CON analysis is not an antitrust matter but is relevant to the overall regulatory clearance timeline.
XIII. Recommended Next Steps and Timeline
Based upon our preliminary assessment, we recommend the following workplan and timeline for the HSR filing process:
We will provide regular status updates to Julian Desmond and Priya Chandrasekar as the filing preparation progresses and upon each significant milestone. We are also available at any time to discuss the antitrust aspects of the transaction by telephone or in person.
XIV. Conclusion
Based upon our preliminary analysis, we conclude that the proposed acquisition of Pinnacle Health Systems, Inc. by Ardent Capital Partners III LP raises no substantive antitrust concerns. The key findings supporting this conclusion are as follows:
•  There are no horizontal overlaps between the parties in any relevant product market or geographic market. Ardent Capital does not own or operate any ambulatory surgical centers or physician practice management entities, and neither of its existing healthcare portfolio companies (Marlowe Asset Management Rehabilitation Holdings LLC or Clearpath Diagnostics Inc.) competes in the same product markets as Pinnacle.
•  The vertical relationship between Marlowe Asset Management Rehabilitation Holdings LLC's physical therapy clinics and Pinnacle's ASCs — arising from the geographic co-presence of 12 co-located facilities in Texas, Florida, and Georgia — is competitively insignificant. Patient choice, payor network constraints, healthcare regulatory requirements (including the Stark Law and the Anti-Kickback Statute), and the fragmented nature of the physical therapy market in each affected MSA all serve to limit the competitive significance of this relationship.
•  Post-transaction market concentration (HHI) will be unchanged in all nine MSAs where Pinnacle operates. The transaction is a financial sponsor-to-financial sponsor buyout that does not combine any competing operations.
•  We assess the probability of a Second Request as very low — less than five percent (5%) — and the overall antitrust risk to the transaction as low.
We recommend proceeding with the HSR filing on the proposed timeline, with a target filing date of February 16, 2024. We will request early termination of the statutory waiting period and prepare a voluntary submission white paper for the FTC staff to facilitate an expedited review. We expect that early termination will be granted within approximately 15 to 25 days of filing, and that the antitrust