Fairness opinions › Medical Devices and Supplies › 2023

Cardiovascular Systems acquired by Abbott: fairness opinion by J.P. Morgan

Announced February 8, 2023 · One-step merger · All cash · DEFM14A filed March 23, 2023
Medical Devices and Supplies Medical Devices
Enterprise value
$850M
EV / LTM EBITDA
—
EBITDA $-11.0M · -4% margin
EV / LTM revenue
3.32x
revenue $256M
DCF discount rate
10.5%–12.5%
Perpetuity growth

Deal terms

ConsiderationAll cash
Price per share$20.00
Premium—
Premium basis—
StructureOne-step merger
Termination fee$26.5M
Reverse termination fee$26.5M
Go-shopNone
Outside date—
FilingDEFM14A · EDGAR index

Implied value per share by method vs. $20.00 offer

Selected companies — FV / CY2023E Revenue $13.75 – $24.75
Precedent transactions — FV / NTM Revenue $19.00 – $31.75
Discounted cash flow $17.00 – $25.00

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

Opinion of J.P. Morgan to the target board

Delivered February 8, 2023 · Fee $15.5M ($13.5M contingent on closing), $2.0M on delivery of the opinion

Discounted cash flow assumptions

Discount rate10.5%–12.5%
Basisweighted average cost of capital of CSI
Terminal valuePerpetuity growth
Perpetuity growth3.0%–4.0%
Exit multiple—
Projection periodFY2023E-FY2027E
Projections usedStrategic Plan Projections (CSI management)
Implied value per share$17.00–$25.00

Unlevered free cash flows discounted to present value as of December 31, 2022; adjusted at management direction for an assumed future financing of $100 million gross proceeds in 2023 (net proceeds added to 2023 UFCF and dilutive impact reflected in share count); present value adjusted by adding net cash and present value of net operating losses as of December 31, 2022.

Selected public companies (7)

Tandem Diabetes Care, Inc. · AtriCure, Inc. · Nevro Corp · Artivion, Inc. · AngioDynamics, Inc. · Axogen, Inc. · Pulmonx Corporation

MultiplePeer lowPeer medianPeer highRange appliedImplied per share
FV / CY2023E Revenue——— 1.7x–3.4x $13.75–$24.75

Selected precedent transactions (7)

DateTargetAcquirerMultiple
2018-08-30K2M Group Holdings, Inc.Stryker Corporation—
2017-12-04Exactech, Inc.TPG Partners VII, LP—
2016-06-27HeartWare International, Inc.Medtronic PLC—
2014-12-17Volcano Corp.Royal Philips NV—
2014-05-27AngioScore Inc.Spectranetics Corp.—
2014-02-03ArthroCare Corp.Smith & Nephew PLC—
2010-04-29ATS Medical, Inc.Medtronic, Inc.—
MultipleLowMedianHighRange appliedImplied per share
FV / NTM Revenue——— 2.5x–4.5x $19.00–$31.75

Estimated fee of approximately $15.5 million, $2 million payable upon delivery of the opinion and the remainder contingent upon consummation of the Merger. Aggregate fees recognized by J.P. Morgan from Abbott during the prior two years were approximately $2,460,000.

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Management projections

Projection yearYear 1Year 2Year 3Year 4CAGR
Revenue$306M$365M$466M$601M25.2%
Revenue growth19.5%19.3%27.7%29.0%
EBITDA$2.0M$17.0M$55.0M$109M279.1%
EBITDA growth—750.0%223.5%98.2%
EBITDA margin1%5%12%18%
Implied EV / EBITDA425.0x50.0x15.5x7.8x

Year-1 growth is against LTM at announcement ($256M revenue, $-11.0M EBITDA); later years are year over year.

CSI management prepared non-public, unaudited "Strategic Plan Projections" for fiscal years 2023 through 2027 as part of the FY2023 annual strategic planning process, presented to the Board on January 24-25, 2023 and used by the Transaction Committee, Board and J.P. Morgan. Projected revenue grows from $256 million in FY2023E to $601 million in FY2027E, with gross profit of $183 million (71.4% margin) rising to $445 million (74.0% margin) and Adjusted EBITDA moving from $(11) million in FY2023E to $109 million in FY2027E. Unlevered free cash flow (calculated by J.P. Morgan from the projections and approved by management) ranged from $(133) million in FY2023E to $34 million in FY2027E.

Process notes

Single financial advisor (J.P. Morgan) delivering an opinion to the CSI Board of Directors; a Transaction Committee of the Board oversaw negotiations and unanimously recommended approval. J.P. Morgan was not authorized to and did not solicit expressions of interest from other parties. J.P. Morgan disclosed ongoing commercial/investment banking relationships with Abbott (agent bank and lender under Abbott credit facilities; ~$2.46 million aggregate fees from Abbott in prior two years) and no material relationships with CSI in the prior two years. CSI and Abbott termination fees are each $26.5 million; the Abbott reverse fee relates to failure to obtain competition law clearances.

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