AMERIGROUP acquired by Wellpoint Healthcare Networks: fairness opinion by Goldman Sachs and Barclays
Announced July 9, 2012 · One-step merger · All cash ·
DEFM14A filed August 30, 2012
Managed Care Health Plans
Enterprise value
$4.8B
equity $4.9B
EV / LTM EBITDA
12.3x
EBITDA $389M · 4% margin
EV / LTM revenue
0.53x
revenue $9.0B
DCF discount rate
9.5%–11.5%
Perpetuity growth
Deal terms
ConsiderationAll cash
Price per share$92.00
Premium43.0%
Premium basisclosing price of $64.34 on July 6, 2012 (last trading day before announcement)
StructureOne-step merger
Termination fee$146M (3.0% of equity)
Reverse termination fee—
Go-shopNone
Outside date—
FilingDEFM14A · EDGAR index
Implied value per share by method vs. $92.00 offer
Selected companies — EV / 2012E EBITDA (Commercial peers) (Goldman Sachs) $58.90 – $72.51
Selected companies — EV / 2012E EBITDA (Medicaid peers) (Goldman Sachs) $58.90 – $72.51
Selected companies — EV / 2012E EBITDA (Medicare peers) (Goldman Sachs) $58.90 – $72.51
Selected companies — 2013E P/E/G ratio (Commercial peers) (Goldman Sachs) $53.86 – $76.95
Selected companies — 2013E P/E/G ratio (Medicaid peers) (Goldman Sachs) $53.86 – $76.95
Selected companies — 2013E P/E/G ratio (Medicare peers) (Goldman Sachs) $53.86 – $76.95
Precedent transactions — EV / LTM EBITDA (Goldman Sachs) $47.89 – $76.10
Precedent transactions — 1-day premium (Goldman Sachs) $70.77 – $90.08
Discounted cash flow (Goldman Sachs) $70.21 – $112.59
Illustrative Present Value of Future Share Price Analysis (Goldman Sachs) $60.92 – $122.70
Selected companies — Price / 2013E EPS (Medicaid companies) (Barclays) $51.30 – $74.38
Precedent transactions — Equity Value / Earnings (1-Year Forward) (Barclays) $61.56 – $92.34
Precedent transactions — EV / LTM EBITDA (Barclays) $58.91 – $72.51
Precedent transactions — EV / 2H 2012E Run-Rate EBITDA (Barclays) $69.63 – $85.91
Discounted cash flow (Barclays) $75.05 – $108.11
Historical Share Price Analysis (Barclays) $37.57 – $75.74
Research Price Targets Analysis (Barclays) $68.00 – $95.00
Transaction Premium Analysis (Barclays) $77.21 – $90.08
Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.
Opinion of Goldman Sachs to the target board
Delivered July 9, 2012 · Fee $18.7M ($15.7M contingent on closing), $3.0M on delivery of the opinion
Discounted cash flow assumptions
Discount rate9.5%–11.5%
Basisestimate of Amerigroup's weighted average cost of capital
Terminal valuePerpetuity growth
Perpetuity growth1.5%–3.5%
Exit multiple5.5x–8.4x implied terminal value EBITDA multiple
Projection period2H2012-2017E
Projections usedForecasts (Amerigroup management Revised Projections / unlevered free cash flow)
Implied value per share$70.21–$112.59
Unlevered free cash flows for second half of 2012 and 2013-2017, discounted to June 30, 2012; net debt of approximately $146 million subtracted.
Selected public companies (11)
Aetna, Inc. (AET) · Cigna Corporation (CI) · Coventry Health Care, Inc. (CVH) · Health Net, Inc. (HNT) · UnitedHealth Group Incorporated (UNH) · WellPoint, Inc. (WLP) · Centene Corporation (CNC) · Molina Healthcare, Inc. (MOH) · Wellcare Health Plans, Inc. (WCG) · Humana Inc. (HUM) · Universal American Corp. (UAM)
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / 2012E EBITDA (Commercial peers) | 5.5x | 6.3x | 8.3x | 8.0x–10.0x | $58.90–$72.51 |
| EV / 2012E EBITDA (Medicaid peers) | 5.7x | 9.0x | 9.1x | 8.0x–10.0x | $58.90–$72.51 |
| EV / 2012E EBITDA (Medicare peers) | 6.6x | 8.2x | 9.8x | 8.0x–10.0x | $58.90–$72.51 |
| 2013E P/E (Commercial peers) | 6.7x | 7.7x | 10.0x | — | — |
| 2013E P/E (Medicaid peers) | 10.2x | 11.1x | 14.3x | — | — |
| 2013E P/E (Medicare peers) | 8.8x | 11.4x | 13.9x | — | — |
| 2013E P/E/G ratio (Commercial peers) | 0.6x | 0.8x | 1.2x | 0.7x–1.0x | $53.86–$76.95 |
| 2013E P/E/G ratio (Medicaid peers) | 0.7x | 0.7x | 1.0x | 0.7x–1.0x | $53.86–$76.95 |
| 2013E P/E/G ratio (Medicare peers) | 0.9x | 0.9x | 0.9x | 0.7x–1.0x | $53.86–$76.95 |
Selected precedent transactions (9)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2011-10-24 | HealthSpring, Inc. | Cigna Corporation | 7.6x EV / LTM EBITDA (2011E EBITDA) |
| 2004-10-14 | First Health Group Corporation | Coventry Health Care, Inc. | 6.7x EV / LTM EBITDA |
| 2007-03-12 | Sierra Health Services, Inc. | United Health Group Incorporated | 11.3x EV / LTM EBITDA |
| 2003-10-27 | Mid Atlantic Medical Services, Inc. | United Health Group Incorporated | 12.9x EV / LTM EBITDA |
| 2004-04-26 | Oxford Health Plans, Inc. | United Health Group Incorporated | 7.7x EV / LTM EBITDA |
| 2005-07-06 | PacifiCare Health Systems, Inc. | United Health Group Incorporated | 13.2x EV / LTM EBITDA |
| 2002-04-29 | Trigon Healthcare, Inc. | WellPoint, Inc. (f/k/a Anthem, Inc.) | 15.6x EV / LTM EBITDA |
| 2003-10-27 | WellPoint Health Networks, Inc. | WellPoint, Inc. (f/k/a Anthem, Inc.) | 9.6x EV / LTM EBITDA |
| 2005-09-27 | WellChoice, Inc. | WellPoint, Inc. (f/k/a Anthem, Inc.) | 12.7x EV / LTM EBITDA |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / LTM EBITDA | 6.7x | 11.3x | 15.6x | 8.0x–13.0x | $47.89–$76.10 |
| 1-day premium | 0.1x | 0.2x | 0.4x | 0.1x–0.4x | $70.77–$90.08 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Implied Premia Analysis | $92.00 represented premia of 43.0% to the $64.34 July 6, 2012 close; 47.5% to the one-month average of $62.38; 45.9% to the three-month average of $63.06; 55.9% to the one-year average of $59.00; and 22.9% to the 52-week high close of $74.87. Implied multiples: EV/LTM (6/30/12) EBITDA 15.9x, EV/2012E EBITDA 12.9x, equity value/2012E net income 24.9x, equity value/2013E net income 17.9x. | — |
| Illustrative Present Value of Future Share Price Analysis | Applied NTM P/E multiples of 12.5x to 15.5x to estimated EPS for each of 2013-2017 per the Forecasts, discounted to June 30, 2012 at a 10.8% cost of equity. | $60.92–$122.70 |
Transaction fee of approximately $18,700,000, $3,000,000 of which became payable upon announcement of the merger and the remainder contingent upon consummation. Goldman Sachs International expects to realize a gain of approximately $19-20 million on its net warrant position related to the 2012 Convertible Notes call spread transactions.
Opinion of Barclays to the target board
Delivered July 9, 2012 · Fee $18.7M ($15.7M contingent on closing), $3.0M on delivery of the opinion
Discounted cash flow assumptions
Discount rate9.0%–11.0%
Basisafter-tax discount rates based on analysis of the weighted average cost of capital of Amerigroup and comparable companies
Terminal valueExit multiple
Perpetuity growth—
Exit multiple5.5x–7.5x LTM EBITDA for the period ending December 31, 2017
Projection period6/30/2012-2017
Projections usedAmerigroup management projections
Implied value per share$75.05–$108.11
After-tax unlevered free cash flows from June 30, 2012 through fiscal year 2017; terminal value as of December 31, 2017.
Selected public companies (9)
Molina Healthcare, Inc. · Centene Corporation · WellCare Health Plans, Inc. · Aetna Inc. · Cigna Corporation · Coventry Health Care, Inc. · HealthNet, Inc. · UnitedHealth Group Incorporated · WellPoint, Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| Price / 2012E EPS (Medicaid companies) | 9.8x | — | 25.6x | — | — |
| Price / 2013E EPS (Medicaid companies) | 10.2x | — | 14.3x | 10.0x–14.5x | $51.30–$74.38 |
| EV / 2012E EBITDA (Medicaid companies) | 5.7x | — | 9.1x | — | — |
| EV / 2013E EBITDA (Medicaid companies) | 5.9x | — | 6.9x | — | — |
| Price / 2012E EPS (Diversified companies mean) | — | — | — | — | — |
Selected precedent transactions (12)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2011-11-22 | XLHealth Corporation | UnitedHealth Group Incorporated | 9.3x EV / LTM EBITDA |
| 2011-10-24 | HealthSpring, Inc. | Cigna Corporation | 7.8x EV / LTM EBITDA |
| 2011-06-08 | CareMore Health Group | WellPoint, Inc. | 10.1x EV / LTM EBITDA |
| 2010-08-26 | Bravo Health Inc. | HealthSpring, Inc. | 6.5x EV / LTM EBITDA |
| 2007-05-24 | Schaller Anderson, Incorporated | Aetna Inc. | 9.7x EV / LTM EBITDA |
| 2007-03-12 | Sierra Health Services, Inc. | UnitedHealth Group Incorporated | 11.3x EV / LTM EBITDA |
| 2005-09-27 | WellChoice, Inc. | WellPoint, Inc. | 12.7x EV / LTM EBITDA |
| 2005-07-06 | PacifiCare Health Systems Inc. | UnitedHealth Group Incorporated | 13.2x EV / LTM EBITDA |
| 2004-04-26 | Oxford Health Plans, Inc. | UnitedHealth Group Incorporated | 7.7x EV / LTM EBITDA |
| 2003-10-27 | Mid-Atlantic Medical Services Inc. (MAMSI) | UnitedHealth Group Incorporated | 12.9x EV / LTM EBITDA |
| 2003-10-27 | WellPoint Heath Networks Inc. | Anthem Inc. | 9.6x EV / LTM EBITDA |
| 2003-06-03 | Cobalt Corporation | WellPoint Health Networks | 12.2x EV / LTM EBITDA |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| Equity Value / Earnings (1-Year Forward) | 11.9x | — | 20.1x | 12.0x–18.0x | $61.56–$92.34 |
| EV / LTM EBITDA | 6.5x | — | 13.2x | 8.0x–10.0x | $58.91–$72.51 |
| EV / 2H 2012E Run-Rate EBITDA | — | — | — | 8.0x–10.0x | $69.63–$85.91 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Historical Share Price Analysis | From July 6, 2011 to July 6, 2012, intraday share price ranged from a low of $37.57 to a high of $75.74; 20-day VWAP was $62.22 and 200-day VWAP was $59.80. | $37.57–$75.74 |
| Research Price Targets Analysis | Publicly available analyst per share price targets as of July 6, 2012: low $68.00, mean $77.25, median $79.00, high $95.00. | $68.00–$95.00 |
| Transaction Premium Analysis | Reviewed one-day premiums paid in 80 selected U.S. transactions valued $2-8 billion from January 1, 2010 to present (quartile means 64%, 39%, 23%, 9%); applied a 20.0%-40.0% premium to the July 6, 2012 closing price of $64.34. | $77.21–$90.08 |
Fees of approximately $18,700,000, of which $3,000,000 became due and payable upon delivery of its opinion, remainder contingent on consummation. Oral opinion rendered July 8, 2012, confirmed in writing dated July 9, 2012.
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Management projections
| Projection year | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | CAGR |
|---|---|---|---|---|---|---|
| Revenue | $11B | $15B | $18B | $20B | $22B | 19.1% |
| Revenue growth | 20.5% | 42.5% | 19.9% | 8.8% | 8.1% | |
| EBITDA | $525M | $689M | $876M | $1.1B | $1.1B | 21.2% |
| EBITDA growth | 35.0% | 31.2% | 27.1% | 20.1% | 7.8% | |
| EBITDA margin | 5% | 4% | 5% | 5% | 5% | |
| Implied EV / EBITDA | 9.1x | 6.9x | 5.5x | 4.5x | 4.2x |
Year-1 growth is against LTM at announcement ($9.0B revenue, $389M EBITDA); later years are year over year.
Goldman Sachs used the "Revised Projections" and unlevered free cash flow forecasts prepared by Amerigroup management (covering the second half of 2012 and fiscal years 2013 through 2017), as approved for its use by Amerigroup. Barclays likewise relied on Amerigroup management projections through fiscal year 2017 for its DCF and multiple-based analyses. Based on the Forecasts, the $92.00 price implied EV/2012E EBITDA of 12.9x, equity value/2012E net income of 24.9x and equity value/2013E net income of 17.9x; Amerigroup's own EV/2012E EBITDA was 8.8x and 2013E P/E 12.5x.
Process notes
Two financial advisors, Goldman Sachs and Barclays, each delivered a fairness opinion to the Amerigroup board (Barclays orally on July 8, 2012, confirmed in writing July 9, 2012). No auction was run; the board negotiated exclusively with WellPoint after concluding only "Company D" was a plausible competing bidder but posed greater antitrust/regulatory risk. Two-tiered termination fee: $73 million for a superior proposal from a party whose bona fide written proposal was received during the 30 days after signing (that window expired August 8, 2012 with no third-party proposals received), otherwise $146 million (approximately 3% of equity value; the lower tier was 1.5%). No go-shop. Goldman Sachs disclosed a conflict relating to outstanding Amerigroup issuer warrant transactions with Goldman Sachs International, which estimated a gain of approximately $19-20 million on its net warrant position as a result of the merger. Both banks disclosed prior investment banking services to WellPoint (~$8 million to Goldman Sachs, ~$1.8 million to Barclays over the prior two years).
Other Managed Care fairness opinions
- Coventry Health Care / Aetna 2012 · 8.9x EV/EBITDA
- Catalyst Health Solutions / SXC Health Solutions 2012 · 19.1x EV/EBITDA
- Medco Health Solutions / Express Scripts Holding 2011 · 9.7x EV/EBITDA
- HealthSpring / Cigna 2011 · 7.0x EV/EBITDA
- Health Net / Centene 2015 · 9.3x EV/EBITDA
- Catamaran / United HealthGroup 2015 · 15.2x EV/EBITDA
All Managed Care opinions → · Goldman Sachs opinions · Barclays opinions