3. Acquisitions

2016 U.S. Acquisitions

On June 1, 2016, the Company completed the acquisition of Pocono Mountain Recovery Center (“Pocono Mountain”), an inpatient psychiatric facility with 108 beds located in Henryville, Pennsylvania, for total consideration of approximately $25.2 million. The Company may make a cash payment of up to $5.0 million under an earn-out agreement, contingent upon achievement by Pocono Mountain of certain operating performance targets for the one-year period ending May 31, 2017.

On May 1, 2016, the Company completed the acquisition of TrustPoint Hospital (“TrustPoint”), an inpatient psychiatric facility with 100 beds located in Murfreesboro, Tennessee, for cash consideration of approximately $62.7 million.

On April 1, 2016, the Company completed the acquisition of Serenity Knolls (“Serenity Knolls”), an inpatient psychiatric facility with 30 beds located in Forrest Knolls, California, for cash consideration of approximately $9.7 million.

Priory

On February 16, 2016, the Company completed the acquisition of Priory Group No. 1 Limited (“Priory”) for a total purchase price of approximately $2.2 billion, including total cash consideration of approximately $1.9 billion and the issuance of 4,033,561 shares of its common stock. Priory is the leading independent provider of behavioral healthcare services in the U.K. At February 16, 2016, Priory operated 324 facilities with approximately 7,100 beds.

The Competition and Markets Authority (“CMA”) in the U.K. has been reviewing the Company’s acquisition of Priory. On July 14, 2016, the CMA announced that the Company’s acquisition of Priory will be referred for a phase 2 investigation unless the Company offers undertakings to address the CMA’s competition concerns relating to the provision of behavioral healthcare services in certain markets. On July 28, 2016, the CMA announced that the Company has offered undertakings to address the CMA’s concerns and that, in lieu of a phase 2 investigation, the CMA will consider the Company’s undertakings. The Company’s undertakings provide for the sale of 19 Priory and Partnerships in Care behavioral healthcare facilities with an aggregate of approximately 750 beds. The Company will not be allowed to integrate Priory’s business until the CMA completes its review process.

2015 U.S. Acquisitions

On December 1, 2015, the Company completed the acquisition of certain facilities from MMO Behavioral Health Systems (“MMO”), including two acute inpatient behavioral health facilities with a total of 80 beds located in Jennings and Covington, Louisiana, for cash consideration of approximately $20.2 million.

On November 1, 2015, the Company completed the acquisitions of (i) Discovery House-Group Inc. (“Discovery House”) for cash consideration of approximately $118.3 million and (ii) Duffy’s Napa Valley Rehab (“Duffy’s”) for cash consideration of approximately $29.6 million. Discovery House operates 19 comprehensive treatment centers located in four states. Duffy’s is a substance abuse facility with 61 beds located in Calistoga, California.

On August 31, 2015, the Company completed the acquisition of a controlling interest in Southcoast Behavioral (“Southcoast”), an inpatient psychiatric facility located in Fairhaven, Massachusetts. The Company owns 75% of the equity interests in the facility. The value of the 25% noncontrolling interest approximates $9.2 million.

On July 1, 2015, the Company completed the acquisition of the assets of Belmont Behavioral Health (“Belmont”), an inpatient psychiatric facility with 147 beds located in Philadelphia, Pennsylvania for cash consideration of approximately $39.0 million which consists of $35.0 million base purchase price and a working capital settlement of $4.0 million.

On March 1, 2015, the Company acquired the stock of Quality Addiction Management, Inc. (“QAM”) for cash consideration of approximately $54.8 million. QAM operates seven comprehensive treatment centers located in Wisconsin.

On February 11, 2015, the Company completed its acquisition of CRC Health Group, Inc. (“CRC”) for total consideration of approximately $1.3 billion. As consideration for the acquisition, the Company issued 5,975,326 shares of its common stock to certain holders of CRC common stock and repaid CRC’s outstanding indebtedness of $904.5 million. CRC is a leading provider of treatment services related to substance abuse and other addiction and behavioral disorders. At the acquisition date, CRC operated 35 inpatient facilities with over 2,400 beds and 81 comprehensive treatment centers located in 30 states.

2015 U.K. Acquisitions

On November 1, 2015, the Company completed the acquisition of Cleveland House, an inpatient psychiatric facility with 32 beds located in England, for cash consideration of approximately $10.3 million.

On October 1, 2015, the Company completed the acquisition of Meadow View, an inpatient psychiatric facility with 28 beds located in England, for cash consideration of approximately $6.8 million.

On September 1, 2015, the Company completed the acquisitions of (i) three facilities from The Danshell Group (“Danshell”) for approximately $59.8 million, (ii) two facilities from Health and Social Care Partnerships (“H&SCP”) for approximately $26.2 million and (iii) Manor Hall for approximately $14.0 million. The inpatient psychiatric facilities acquired from Danshell have an aggregate of 73 beds and are located in England. The inpatient psychiatric facilities acquired from H&SCP have an aggregate of 50 beds and are located in England. Manor Hall has 26 beds and is located in England.

On July 1, 2015, the Company completed the acquisition of The Manor Clinic, a substance abuse facility with 15 beds located in England, for cash consideration of approximately $5.9 million.

On June 1, 2015, the Company completed the acquisitions of (i) one facility from Choice Lifestyles (“Choice”) for cash consideration of approximately $25.9 million and (ii) 15 facilities from Care UK Limited (“Care UK”) for approximately $88.2 million. The inpatient psychiatric facility acquired from Choice has 42 beds and is located in England. The inpatient psychiatric facilities acquired from Care UK have an aggregate of 299 beds and are located in England.

On April 1, 2015, the Company completed the acquisitions of (i) two facilities from Choice for cash consideration of approximately $37.5 million, (ii) Pastoral Care Group (“Pastoral”) for approximately $34.2 million and (iii) Mildmay Oaks f/k/a Vista Independent Hospital (“Mildmay Oaks”) for cash consideration of approximately $14.9 million. The two inpatient psychiatric facilities acquired from Choice have an aggregate of 48 beds and are located in England. Pastoral operates two inpatient psychiatric facilities with an aggregate of 65 beds located in Wales. Mildmay Oaks is an inpatient psychiatric facility with 67 beds located in England.

Summary of Acquisitions

The Company selectively seeks opportunities to expand and diversify its base of operations by acquiring additional facilities. Approximately $374.4 million of the goodwill associated with domestic acquisitions completed in 2016 and 2015 is deductible for federal income tax purposes. The fair values assigned to certain assets and liabilities assumed by the Company have been estimated on a preliminary basis and are subject to change as new facts and circumstances emerge that were present at the date of acquisition. Specifically, the Company is further assessing the valuation of certain real property and intangible assets and certain tax matters as well as certain receivables and assumed liabilities of Pocono Mountain, TrustPoint, Serenity Knolls, Priory, MMO, Discovery House, Duffy’s, Cleveland House, Meadow View, Danshell, H&SCP, Manor Hall, The Manor Clinic and Belmont.

The preliminary fair values of assets acquired and liabilities assumed, at the corresponding acquisition dates, during the six months ended June 30, 2016 in connection with the 2016 acquisitions were as follows (in thousands):


	Priory		Other		Total
Cash	$	10,253	$	2,488	$	12,741
Accounts receivable		57,832		4,289		62,121
Prepaid expenses and other current assets		7,921		75		7,996
Property and equipment		1,603,306		35,400		1,638,706
Goodwill		668,915		95,274		764,189
Intangible assets		23,200		204		23,404
Other assets		7,760		47		7,807

Total assets acquired		2,379,187		137,777		2,516,964
Accounts payable		24,203		805		25,008
Accrued salaries and benefits		39,588		760		40,348
Other accrued expenses		47,016		293		47,309
Deferred tax liabilities – noncurrent		67,598		—		67,598
Long-term debt		1,348,389		—		1,348,389
Other liabilities		45,162		30,242		75,404

Total liabilities assumed		1,571,956		32,100		1,604,056

Net assets acquired	$	807,231	$	105,677	$	912,908

The preliminary fair values of assets acquired and liabilities assumed, at the corresponding acquisition dates, during the year ended December 31, 2015 in connection with the 2015 acquisitions were as follows (in thousands):


	CRC		Other		Total
Cash	$	19,599	$	5,330	$	24,929
Accounts receivable		47,035		20,566		67,601
Prepaid expenses and other current assets		26,945		2,674		29,619
Property and equipment		136,163		273,143		409,306
Goodwill		1,043,601		321,387		1,364,988
Intangible assets		37,000		204		37,204
Deferred tax assets-noncurrent		74,383		—		74,383
Other assets		6,478		51		6,529

Total assets acquired		1,391,204		623,355		2,014,559
Accounts payable		4,741		4,937		9,678
Accrued salaries and benefits		14,827		3,321		18,148
Other accrued expenses		38,873		5,290		44,163
Deferred tax liabilities – noncurrent		—		13,541		13,541
Debt		904,467		—		904,467
Other liabilities		34,720		10		34,730

Total liabilities assumed		997,628		27,099		1,024,727

Redeemable noncontrolling interests		—		9,132		9,132

Net assets acquired	$	393,576	$	587,124	$	980,700

Other

The qualitative factors comprising the goodwill acquired in the CRC, QAM, Choice, Pastoral, Mildmay Oaks, Care UK, The Manor Clinic, Belmont, Southcoast, Danshell, H&SCP, Manor Hall, Meadow View, Cleveland House, Duffy’s, Discovery House, MMO, Priory, Serenity Knolls, TrustPoint and Pocono Mountain acquisitions (collectively the “2015 and 2016 Acquisitions”) include efficiencies derived through synergies expected by the elimination of certain redundant corporate functions and expenses, the ability to leverage call center referrals to a broader provider base, coordination of services provided across the combined network of facilities, achievement of operating efficiencies by benchmarking performance, and applying best practices throughout the combined companies.

Transaction-related expenses comprised the following costs for the three and six months ended June 30, 2016 and 2015 (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Advisory and financing commitment fees	$	—	$	—	$	14,850	$	10,337
Legal, accounting and other costs		4,653		5,234		16,101		9,054
Severance and contract termination costs		1,421		1,923		1,421		6,182

	$	6,074	$	7,157	$	32,372	$	25,573

Pro Forma Information

The condensed consolidated statements of income for the three and six months ended June 30, 2016 include revenue of $424.1 million and $718.7 million, respectively, and income from continuing operations before income taxes of $34.0 million and $81.4 million, respectively, related to the 2015 and 2016 Acquisitions. The condensed consolidated statements of income for the three and six months ended June 30, 2015 include revenue of $141.2 million and $209.8 million, respectively, and income from continuing operations before income taxes of $34.7 million and $48.1 million, respectively, related to acquisitions completed in 2015.

The following table provides certain pro forma financial information for the Company as if the 2015 and 2016 Acquisitions occurred as of January 1, 2015 (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Revenue	$	761,048	$	726,929	$	1,490,720	$	1,423,281

Income from continuing operations, before income taxes	$	74,572	$	55,320	$	87,925	$	71,426