Fairness opinions › Professional Services › 2018

Birner Dental Management Services acquired by Mid-Atlantic Dental Partners: fairness opinion by Cain Brothers

Announced October 3, 2018 · One-step merger · Cash plus CVR · DEFM14A filed November 19, 2018

Professional Services Dentistry

Enterprise value

$39.0M

EV / LTM EBITDA

21.9x

EBITDA $1.8M · 3% margin

EV / LTM revenue

0.64x

revenue $60.9M

DCF discount rate

19.0%–22.0%

Perpetuity growth

Deal terms

ConsiderationCash plus CVR

Price per share$10.62

Premium—

Premium basisCompany share price of $5.25 immediately prior to announcement

StructureOne-step merger

Termination fee$2.0M

Reverse termination fee$2.0M

Go-shop28 days · $1.3M reduced fee

Outside date—

FilingDEFM14A · EDGAR index

CVR: A contingent value right agreement was entered into in connection with the merger (CVR agreement reviewed by Cain Brothers); terms not detailed in the sliced sections

$10.62 in cash, without interest and less any applicable withholding taxes, for each share of common stock, plus contingent value rights under a CVR agreement

Implied value per share by method vs. $10.62 offer

Selected companies — EV / 2018E EBITDA $1.39

Precedent transactions — EV / LTM EBITDA - 8 DSO transactions (applied to estimated FY2018 EBITDA) $2.21

Precedent transactions — EV / LTM EBITDA - 21 physician practice management / multi-site healthcare transactions (applied to estimated FY2018 EBITDA) $2.30

Discounted cash flow $4.89 – $6.59

Premium Paid Analysis $6.07 – $8.60

Historical Stock Trading Analysis $4.00 – $9.50

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

Opinion of Cain Brothers to the target board

Delivered October 2, 2018 · Fee $1.1M, $0.3M on delivery of the opinion

Discounted cash flow assumptions

Discount rate19.0%–22.0%

BasisWACC

Terminal valuePerpetuity growth

Perpetuity growth1.0%–2.0%

Exit multiple—

Projection period2018E-2022P

Projections usedCompany management estimated fiscal 2018 results and projections for fiscal years 2019 through 2022

Implied value per share$4.89–$6.59

Cash flows and terminal values discounted to present value as of December 31, 2018; terminal growth reflects GDP growth of 1.0%-2.0%; assumed 10,812 new shares issued from exercisable options

Selected public companies (8)

Apollo Medical Holdings, Inc. · MEDNAX, Inc. · American Renal Associates Holdings · DaVita Inc. · Hanger, Inc. · RadNet, Inc. · Surgery Partners, Inc. · U.S. Physical Therapy, Inc.

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
EV / LTM EBITDA	9.1x	12.1x	27.8x	—	—
EV / 2018E EBITDA	9.1x	12.6x	26.6x	8.8x	$1.39

Selected precedent transactions (29)

Date	Target	Acquirer	Multiple
2015-03	Aspen Dental Management, Inc.	American Securities LLC	12.0x EV / LTM EBITDA
2012-11	Heartland Dental, LLC	Teachers' Private Capital	11.0x EV / LTM EBITDA
2012-10	Western Dental Services, Inc.	Court Square Capital Partners L.P.	8.6x EV / LTM EBITDA
2011-11	American Dental Partners, Inc.	JLL Partners	8.0x EV / LTM EBITDA
2011-04	Midwest Dental, Inc.	FFL Partners, LLC	10.0x EV / LTM EBITDA
2010-12	ReachOut Healthcare America Ltd.	Morgan Stanley Private Equity	9.4x EV / LTM EBITDA
2010-11	Smile Brands Group Inc.	Welsh, Carson, Anderson & Stowe LP	10.6x EV / LTM EBITDA
2010-08	Aspen Dental Management, Inc.	Ares Management LLC; Leonard Green & Partners	9.0x EV / LTM EBITDA
2018-06	Envision Healthcare Corporation	KKR & Co. L.P.	9.7x EV / LTM EBITDA
2018-04	Sound Inpatient Physicians, Inc.	Summit Partners LLP	19.5x EV / LTM EBITDA
2017-12	DaVita Medical Holdings, LLC	UnitedHealth Group	13.2x EV / LTM EBITDA
2017-10	Synergy Radiology Associates	MEDNAX, Inc.	8.0x EV / LTM EBITDA
2017-09	Jefferson Radiology & Imaging Associates	MEDNAX, Inc.	8.0x EV / LTM EBITDA
2017-08	Radiology Associates of South Florida	MEDNAX, Inc.	8.0x EV / LTM EBITDA
2017-07	OB Hospitalist Group, LLC	Gryphon Investors	13.9x EV / LTM EBITDA
2017-05	Medical Solutions L.L.C.	TPG Growth	10.1x EV / LTM EBITDA
2017-01	Radiology Alliance & Infinity Management	MEDNAX, Inc.	8.0x EV / LTM EBITDA
2017-01	Surgical Care Affiliates, Inc.	Optum, Inc.	12.3x EV / LTM EBITDA
2016-12	Alliance Healthcare Services, Inc.	Fujian Thaihot Investment Co., Ltd.	6.2x EV / LTM EBITDA
2016-10	TeamHealth Holdings, Inc.	The Blackstone Group L.P.	12.9x EV / LTM EBITDA
2016-06	Envision Healthcare Holdings, Inc.	AmSurg Corp.	12.6x EV / LTM EBITDA
2016-03	Emergency Physicians Medical Group	EmCare Inc.	5.2x EV / LTM EBITDA
2015-08	IPC Healthcare, Inc.	TeamHealth Holdings, Inc.	20.1x EV / LTM EBITDA
2015-07	Questcare Medical Services	EmCare Inc.	5.1x EV / LTM EBITDA
2015-05	Virtual Radiologic Corporation	MEDNAX, Inc.	11.1x EV / LTM EBITDA
2015-01	VISTA Staffing Solutions, Inc.	EmCare Inc.	9.8x EV / LTM EBITDA
2015-01	Scottsdale Emergency Associates	EmCare Inc.	7.7x EV / LTM EBITDA
2014-06	Phoenix Physicians, LLC	EmCare Inc.	8.3x EV / LTM EBITDA
2014-05	Sheridan Healthcare, Inc.	AmSurg Corp.	12.2x EV / LTM EBITDA

Multiple	Low	Median	High	Range applied	Implied per share
EV / LTM EBITDA - 8 DSO transactions (applied to estimated FY2018 EBITDA)	8.0x	9.7x	12.0x	—	$2.21
EV / LTM EBITDA - 21 physician practice management / multi-site healthcare transactions (applied to estimated FY2018 EBITDA)	5.1x	9.8x	20.1x	—	$2.30
EV / LTM EBITDA - all 29 precedent transactions	—	9.7x	—	—	—

Other analyses

Analysis	Summary	Implied per share
Premium Paid Analysis	Reviewed 124 transactions since 2014 involving U.S. publicly traded healthcare targets (excluding premiums over 1,000%). Median premiums: 1-day 37.4%, 1-week 35.6%, 4-weeks 44.2%. Applied 25th and 75th percentile 1-day premiums (15.7% and 63.9%) to the company's pre-announcement share price of $5.25.	$6.07–$8.60
Historical Stock Trading Analysis	52-week trading range of company common stock prior to October 1, 2018, from $4.00 per share (November 10, 2017) to $9.50 per share (January 2, 2018), including trading volume for last three months.	$4.00–$9.50

Aggregate fee of approximately $1.06 million based on merger consideration of $10.62 per share in cash; $250,000 payable upon delivery of the fairness opinion. Oral opinion rendered October 1, 2018, confirmed in writing October 2, 2018.

3,000+ healthcare deal-level valuation multiples

The Valuation database includes financial details for more than 3,000 healthcare M&A transactions, private and public, with deal-level multiples, categorized by segment, type, and year.

See the Valuation database →

Management projections

Projection year	Year 1	Year 2	Year 3	Year 4	CAGR
Revenue	$67.6M	$72.7M	$76.4M	$80.0M	5.8%
Revenue growth	11.0%	7.5%	5.1%	4.7%
EBITDA	$4.4M	$6.0M	$7.0M	$8.0M	22.1%
EBITDA growth	146.5%	36.4%	16.7%	14.3%
EBITDA margin	7%	8%	9%	10%
Implied EV / EBITDA	8.9x	6.5x	5.6x	4.9x

Year-1 growth is against LTM at announcement ($60.9M revenue, $1.8M EBITDA); later years are year over year.

Management provided estimated fiscal 2018 results and projections for fiscal years 2019-2022, plus TTM August 31, 2018 actuals. Net dental practice revenue was projected to grow from $60.9 million in FY2018E to $80.0 million in FY2022P, with Adjusted Corporate EBITDA rising from $1.8 million (2.9% margin) in FY2018E to $8.0 million (10.0% margin) in FY2022P; Adjusted Office-Level EBITDA grows from $5.5 million to $12.1 million. Projections assumed successful implementation of operational initiatives (provider and hygiene productivity improvements, more Invisalign procedures) and reflected August 2018 headcount reductions.

Process notes

Cain Brothers (a division of KeyBanc Capital Markets) was the sole financial advisor and delivered its opinion to the Birner Dental board; an oral opinion was given October 1, 2018 and confirmed in writing October 2, 2018. A Special Transaction Committee negotiated with Mid-Atlantic Dental. Mid-Atlantic's initial July 5, 2018 proposal was $10.00/share (EV ~$33.1 million); a September 7, 2018 LOI valued the company at $36.0 million EV ($9.87/share) before the final $10.62/share cash plus CVR deal. Deal included a 28-day go-shop period ending October 31, 2018 during which Cain Brothers contacted 23 parties, three signed confidentiality agreements, and no superior offers were received. Termination fee of $2.0 million (~4.9% of enterprise value) or $1.25 million (~3.1%) for a go-shop party; expense reimbursement up to $1.25 million; reverse termination fee of $2.0 million capping Mid-Atlantic's liability. Cain Brothers' comparable company and precedent transaction analyses implied per-share values ($1.39-$2.30) well below the merger consideration; the DCF and premiums-paid analyses were higher. Enterprise value of ~$40.8 million derived from board's statement that the $2 million fee equals approximately 4.9% of enterprise value — treat as approximate.

Other Professional Services fairness opinions

IntegraMed America / Sagard Capital Partners 2012 · 8.5x EV/EBITDA
American Dental Partners / JLL Partners 2011 · 8.1x EV/EBITDA
Pet DRx / VCA 2010 · 9.8x EV/EBITDA

All Professional Services opinions → · Cain Brothers opinions