Fairness opinions › Home-Based Services › 2017

Almost Family acquired by LHC Group: fairness opinion by Jefferies and Guggenheim Securities

Announced November 16, 2017 · Stock merger · All stock · DEFM14A filed February 13, 2018

Home-Based Services Home Health

Enterprise value

$933M

EV / LTM EBITDA

14.3x

EBITDA $65.4M · 8% margin

EV / LTM revenue

1.16x

revenue $804M

DCF discount rate

8.5%–10.0%

Perpetuity growth

Deal terms

ConsiderationAll stock

Price per share$62.93

Premium19.4%

Premium basisAlmost Family closing stock price of $52.70 on November 14, 2017

StructureStock merger

Termination fee$30.0M

Reverse termination fee$30.0M

Go-shopNone

Outside date—

FilingDEFM14A · EDGAR index

Each share of Almost Family common stock converted into 0.9150 shares of LHC Group common stock; implied merger price of $62.93 per Almost Family share based on LHC's closing price of $68.78 on November 14, 2017.

Implied value per share by method vs. $62.93 offer

Selected companies — EV / NTM Adj. EBITDA - NCI+SBC (Almost Family) (Guggenheim Securities) $42.19 – $79.47

Selected companies — Price / NTM Adj. EPS (Almost Family) (Guggenheim Securities) $51.75 – $79.63

Selected companies — EV / NTM Adj. EBITDA - NCI+SBC (LHC) (Guggenheim Securities) $48.74 – $84.34

Selected companies — Price / NTM Adj. EPS (LHC) (Guggenheim Securities) $54.97 – $79.25

Precedent transactions — Transaction EV / LTM Adj. EBITDA - NCI+SBC (Guggenheim Securities) $43.94 – $51.47

Discounted cash flow (Guggenheim Securities) $41.71 – $56.52

Almost Family Stock Price Range During Past Year (informational) (Guggenheim Securities) $39.34 – $62.95

Wall Street Equity Research Price Targets (informational) (Guggenheim Securities) $48.90 – $54.33

Illustrative Pro Forma Value of Merger Consideration (Guggenheim Securities) $60.34 – $66.75

Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.

Opinion of Jefferies to the acquirer board

Delivered November 15, 2017 · Fee $7.0M ($6.0M contingent on closing), $1.0M on delivery of the opinion

Discounted cash flow assumptions

Discount rate10.5%–11.5%

BasisLHC weighted average cost of capital (10.50%-11.50%); Almost Family WACC of 11.00%-12.00%

Terminal valuePerpetuity growth

Perpetuity growth4.5%–5.5%

Exit multiple—

Projection period2017E-2022E

Projections usedLHC Management Projections and Almost Family Management Projections (as adjusted by LHC management)

Implied value per share$37.73–$52.87

Stand-alone DCF without cost synergies, discounted to present value as of December 31, 2017. LHC implied per share range $48.86-$70.04; Almost Family implied per share range $37.73-$52.87. Tax rate 41.4% for LHC and 39.5% for Almost Family for 2018-2022. Implied exchange ratio reference range 0.5387x-1.0822x vs. 0.9150x merger exchange ratio.

Selected public companies (5)

Almost Family, Inc. (AFAM) · LHC Group, Inc. (LHCG) · Addus HomeCare Corporation · Amedisys, Inc. · Chemed Corporation

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
TEV / CY2017E Adjusted EBITDA-NCI (LHC)	11.3x	—	16.2x	14.0x–16.0x	$56.06–$65.42
TEV / CY2018E Adjusted EBITDA-NCI (LHC)	10.2x	—	14.6x	12.5x–14.0x	$65.82–$74.86
TEV / CY2017E Adjusted EBITDA-NCI+SBC (LHC)	10.6x	—	15.2x	13.5x–15.0x	$58.12–$65.63
TEV / CY2018E Adjusted EBITDA-NCI+SBC (LHC)	9.3x	—	14.6x	11.5x–13.0x	$63.66–$73.20
TEV / CY2017E Adjusted EBITDA-NCI (Almost Family)	11.3x	—	16.2x	13.5x–15.5x	$51.92–$61.02
TEV / CY2018E Adjusted EBITDA-NCI (Almost Family)	10.2x	—	14.6x	12.0x–13.5x	$59.90–$68.57
TEV / CY2017E Adjusted EBITDA-NCI+SBC (Almost Family)	10.6x	—	15.2x	12.5x–14.0x	$50.00–$57.14
TEV / CY2018E Adjusted EBITDA-NCI+SBC (Almost Family)	9.3x	—	14.6x	11.0x–12.5x	$56.49–$65.49
Price / CY2017E Adjusted EPS (LHC)	20.7x	—	28.6x	25.0x–27.5x	$59.72–$65.69
Price / CY2018E Adjusted EPS (LHC)	18.8x	—	26.1x	22.0x–25.0x	$66.03–$75.04
Price / CY2017E Adjusted EPS (Almost Family)	20.7x	—	28.6x	24.5x–27.0x	$54.95–$60.56
Price / CY2018E Adjusted EPS (Almost Family)	18.8x	—	26.1x	20.5x–23.5x	$62.85–$72.04

Other analyses

Analysis	Summary	Implied per share
Implied Exchange Ratio Reference Ranges - Selected Public Companies (Adjusted EBITDA-NCI)	2017E: 0.7937x-1.0886x; 2018E: 0.8001x-1.0418x vs. merger exchange ratio of 0.9150x	—
Implied Exchange Ratio Reference Ranges - Selected Public Companies (Adjusted EBITDA-NCI+SBC)	2017E: 0.7618x-0.9831x; 2018E: 0.7717x-1.0288x vs. merger exchange ratio of 0.9150x	—
Implied Exchange Ratio Reference Ranges - P/E	2017E: 0.8366x-1.0141x; 2018E: 0.8375x-1.0910x vs. merger exchange ratio of 0.9150x	—
Relative Contribution Analysis (informational)	LHC/Almost Family contributions to 2017E-2018E net revenue, Adjusted EBITDA-NCI, Adjusted EBITDA-NCI+SBC and Adjusted Net Income; implied exchange ratio reference range of 0.8679x-1.0089x vs. 0.9150x merger ratio. 2017E net revenue $1,064.8m (LHC) vs $803.9m (AFAM); 2018E $1,222.1m vs $850.2m.	—
Historical Exchange Ratio Analysis (informational)	Implied exchange ratios over five years ending 11/14/2017: closing 0.7662x; last one year high 1.0391x, low 0.6186x, average 0.8829x; two-year average 0.9376x; three-year average 0.9786x vs. 0.9150x merger ratio.	—
Pro Forma Impact of the Merger	Jefferies considered the pro forma impact of the merger on LHC and Almost Family.	—

Aggregate fee of approximately $7.0 million; $1.0 million payable upon delivery of opinion and approximately $6.0 million contingent upon consummation of the merger. Jefferies opined the exchange ratio was fair, from a financial point of view, to LHC.

Opinion of Guggenheim Securities to the target board

Delivered November 15, 2017 · Fee $9.8M ($7.3M contingent on closing)

Discounted cash flow assumptions

Discount rate8.5%–10.0%

BasisAlmost Family weighted average cost of capital (8.50%-10.00%); LHC WACC of 8.00%-9.50%

Terminal valuePerpetuity growth

Perpetuity growth1.8%–2.3%

Exit multiple—

Projection period2017E-2022E

Projections usedFive-year financial projections provided by Almost Family senior management (and LHC senior management for LHC, approved by Almost Family management)

Implied value per share$41.71–$56.52

Almost Family stand-alone DCF implied $41.71-$56.52 per share; LHC stand-alone DCF implied $49.61-$69.23 per share. Terminal values cross-checked against implied terminal year Adj. EBITDA-NCI+SBC multiples. Implied merger price of $62.93 was above Almost Family's DCF range.

Selected public companies (5)

Amedisys, Inc. · Addus HomeCare Corporation · Chemed Corporation · Almost Family, Inc. (AFAM) · LHC Group, Inc. (LHCG)

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
EV / NTM Adj. EBITDA - NCI+SBC (Almost Family)	9.4x	11.4x	14.8x	9.4x–14.8x	$42.19–$79.47
Price / NTM Adj. EPS (Almost Family)	20.8x	23.6x	27.7x	20.8x–27.7x	$51.75–$79.63
EV / NTM Adj. EBITDA - NCI+SBC (LHC)	9.4x	11.4x	14.8x	9.4x–14.8x	$48.74–$84.34
Price / NTM Adj. EPS (LHC)	20.8x	23.6x	27.7x	20.8x–27.7x	$54.97–$79.25

Other analyses

Analysis	Summary	Implied per share
Almost Family Stock Price Range During Past Year (informational)	52-week trading range for Almost Family common stock of $39.34-$62.95; LHC range $41.66-$76.14.	$39.34–$62.95
Wall Street Equity Research Price Targets (informational)	Almost Family analyst price targets of $54.00-$60.00 discounted at 10.4% cost of equity to present values of $48.90-$54.33; LHC targets of $63.00-$83.00 discounted at 9.9% to $57.33-$75.53.	$48.90–$54.33
Historical Trading Market Exchange Ratio Analysis	Merger exchange ratio of 0.9150 vs. observed trading market exchange ratios: 0.7662 at 11/14/17 (19.4% premium), past-year average 0.8836 (3.6% premium), past-two-year average 0.9375 ((2.4)% discount).	—
Implied Exchange Ratio Analysis	Implied exchange ratios: DCF 0.6025-1.1392; Wall Street consensus NTM Adj. EBITDA-NCI+SBC 0.5257-1.4517; management NTM Adj. EBITDA-NCI+SBC 0.5657-1.5482; Wall Street NTM Adj. EPS 0.7059-1.2555; management NTM Adj. EPS 0.7535-1.3401; stock price range 0.5167-1.5112; research price targets 0.6474-0.9477. Overall reference range 0.5167-1.5482 vs. 0.9150 merger ratio.	—
Illustrative Has/Gets Analysis	Pro forma intrinsic value impact to Almost Family holders ranged from 1.7% dilution to 27.9% accretion depending on perpetuity growth rate (1.75%-2.25%) and with/without capital markets and cost synergies; WACCs of 8.50%-10.00% (Almost Family stand-alone) and 7.75%-9.25% (combined company).	—
Contribution Analysis (informational)	Compared Almost Family's and LHC's Adj. EBITDA-NCI+SBC and adjusted net income contribution percentages (leverage adjusted) with merger-implied ownership splits of 41.5%/58.5%, both with and without synergies.	—
Implied Merger Multiples / Premia	Implied merger price $62.93 per Almost Family share: 19.4% premium to 11/14/17 close of $52.70, (0.0)% to past year high of $62.95, 27.8% to 90-day VWAP of $49.23; transaction EV / Adj. EBITDA-NCI+SBC of 15.1x LTM, 13.3x NTM consensus, 12.0x NTM management estimates.	—
Illustrative Pro Forma Value of Merger Consideration	Illustrative pro forma market-based value of merger consideration $66.75 per share; illustrative pro forma DCF-based value $60.34 per share.	$60.34–$66.75

Cash transaction fee based on a percentage of aggregate merger value, estimated at $9,762,658, payable on consummation; a cash milestone fee of $2,440,665 became payable upon execution of the definitive agreement and will be credited against the transaction fee.

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Management projections

Projection year	Year 1	Year 2	Year 3	Year 4	Year 5	CAGR
Revenue	$850M	$894M	$940M	$989M	$1.0B	5.2%
Revenue growth	5.8%	5.2%	5.2%	5.2%	5.2%
EBITDA	$87.8M	$94.7M	$102M	$110M	$118M	7.6%
EBITDA growth	34.3%	7.9%	7.9%	7.3%	7.3%
EBITDA margin	10%	11%	11%	11%	11%
Implied EV / EBITDA	10.6x	9.9x	9.1x	8.5x	7.9x

Year-1 growth is against LTM at announcement ($804M revenue, $65.4M EBITDA); later years are year over year.

Both advisors used management projections for calendar years 2017 through 2022: LHC Management Projections and Almost Family Management Projections (the latter adjusted by LHC management for Jefferies' use). Per the contribution analysis, LHC 2017E net revenue was $1,064.8m rising to $1,222.1m in 2018E, with Adjusted EBITDA-NCI of $85.6m (2017E) and $110.1m (2018E); Almost Family 2017E net revenue was $803.9m rising to $850.2m in 2018E, with Adjusted EBITDA-NCI of $65.4m (2017E) and $83.2m (2018E). Guggenheim also reviewed cost savings/combination synergy estimates jointly prepared by both managements.

Process notes

Merger of equals-style all-stock transaction with two fairness opinions, both dated November 15, 2017: Jefferies opined to the LHC board that the 0.9150x exchange ratio was fair to LHC (acquirer-side opinion), and Guggenheim Securities opined to the Almost Family board that the exchange ratio was fair to Almost Family stockholders (excluding LHC and affiliates). Guggenheim was not asked to solicit indications of interest from third parties. Termination fee of $30 million is mutual/reciprocal, plus expense reimbursement of up to $5 million by either party; neither party may terminate to accept a superior proposal. Guggenheim named eight selected precedent M&A transactions in the home healthcare sector but the filing does not identify them individually.

Other Home-Based Services fairness opinions

LHC Group / Almost Family 2017 · 15.5x EV/EBITDA
Gentiva Health Services / Kindred Healthcare Services 2014 · 9.7x EV/EBITDA
LHC Group / UnitedHealth Group 2022 · 20.8x EV/EBITDA
Lincare / Linde AG 2012 · 9.1x EV/EBITDA
Amedisys / UnitedHealth Group 2023 · 15.2x EV/EBITDA
Odyssey Healthcare / Gentiva Health Services 2010 · 9.8x EV/EBITDA

All Home-Based Services opinions → · Jefferies opinions · Guggenheim Securities opinions