A new kid on Psych Solutions' block?

Wednesday, August 13, 2008 at 2:33am

According to one analyst report published yesterday, Psychiatric Solutions may soon have some hefty competition in the behavioral M&A market it has dominated in recent years.

Darren Lehrich of Deutsche Bank Securities downgraded the stock from ‘buy’ to ‘hold’ and lowered his price target to $40.

On the face of it, the news seemed fairly innocuous as stock opinions move with great frequency. But Lehrich’s reasoning for the shift caught attention.

He was quick to point out that his new appraisal was not indicative of his feelings on the sector in general. Instead, he was focused on new competitive challenges Psych Solutions may face down the road.

And just who is the competition Lehrich sees in the offing? HCA.

Under a heading of “A new (yet old) kid coming to town,” he wrote that industry sources have informed his team that the hospital giant, which currently has only a small psychiatric operation, may be looking to develop a larger portfolio.

Lehrich touched on the positive possibility that HCA could represent a strategic buyer for PSI but quickly discounted the idea. Instead, he said HCA’s — at this point purely hypothetical – entry into the market is more likely to be “methodical and absent any large transactions initially.”

While all of this remains pure speculation, or rumor mongering, suddenly having a truly worthy adversary is an interesting prospect for a company like Psych Solutions, which has long been the big bat in its space.

HCA officials could not be reached for comment on Tuesday.

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