Catalyst Health Solutions acquired by SXC Health Solutions: fairness opinion by Goldman Sachs and Barclays and J.P. Morgan
Deal terms
$28.00 in cash plus 0.6606 of a share of SXC common stock per share of Catalyst common stock; implied value of $81.02 per share based on SXC closing price of $80.265 on April 17, 2012. Catalyst stockholders would own approximately 35% of SXC.
Implied value per share by method vs. $28.00 offer
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
Discounted cash flow assumptions
Stand-alone Catalyst present value $50.97-$90.22; stand-alone SXC $65.57-$97.90. Using an 8.75% discount rate and 3.0% perpetuity growth on combined-company cash flows with synergies, illustrative present value of the per share merger consideration was $81.15.
Selected public companies (11)
Express Scripts Holding Company · CVS Caremark Corporation · Walgreen Company · Unitedhealth Group, Inc. · Humana Inc. · Cigna Corp. · Aetna Inc. · Coventry Health Care Inc. · WellPoint Inc. · SXC Health Solutions Corp. · Catalyst Health Solutions, Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / 2012E EBITDA (PBM peers) | 12.4x | 16.2x | 20.0x | — | — |
| EV / 2012E EBITDA (drug retailers) | 6.5x | 7.1x | 7.6x | — | — |
| EV / 2012E EBITDA (managed care) | 6.5x | 6.7x | 7.6x | — | — |
| P / 2012E EPS (PBM peers) | 15.8x | 24.5x | 33.2x | — | — |
| P / 2013E EPS (PBM peers) | 12.6x | 19.6x | 26.6x | 18.0x–25.0x | $57.54–$79.92 |
| 2013E P/E/G ratio | 0.7x | 0.8x | 0.9x | 0.8x–1.1x | $51.15–$70.33 |
Selected precedent transactions (7)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2011-07-21 | Medco Health Solutions, Inc. | Express Scripts Inc. | — |
| 2008-02-26 | National Medical Health Card Systems, Inc. | SXC Health Solutions Corp. | — |
| 2007-07-02 | Option Care Enterprises Inc. | Walgreen Company | — |
| 2006-11-01 | Caremark RX, Inc. | CVS Caremark Corporation | — |
| 2005-07-21 | Priority Healthcare Corporation | Express Scripts Inc. | — |
| 2005-02-23 | Accredo Health Group, Inc. | Medco Health Solutions, Inc. | — |
| 2003-09-03 | AdvancePCS | Caremark RX, Inc. | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / LTM EBITDA | 11.9x | — | 16.7x | — | — |
| 1-day premium | 0.1x | 0.3x | 0.4x | — | — |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Implied Premia and Multiples Analysis | Implied merger consideration value of $81.02 represented a 27.5% premium to the 4/17/2012 close, 28.9% to the 1-month average, 43.1% to the 1-year average and 21.8% to the 52-week high. Implied EV/2011A reported EBITDA 21.6x, adjusted 2011A EBITDA 19.9x, IBES 2012E EBITDA 17.9x; P/E of 30.0x IBES 2012E, 24.2x IBES 2013E, 30.0x management 2012E, 25.3x management 2013E; IBES 2013E P/E/G 1.2x. | — |
| Historic Implied Premia Analysis | Implied value of the merger consideration based on SXC share prices 1 month, 3 months, 1 year and 3 years prior implied premia of 24.0%, 21.9%, 17.5% and 64.6% (and 23.7%, 22.2%, 19.0%, 29.4% versus corresponding average prices). | — |
| Illustrative Present Value of Future Stock Price Analysis | Applying NTM P/E multiples of 23.5x and the 3-year average 20.5x to Catalyst estimated 2013-2016 EPS and discounting at 9.25% cost of equity gave stand-alone Catalyst present values of $62.69-$96.01 (SXC $86.66-$113.52). Combined-company analysis with P/E multiples of 23.5x, 28.3x and 33.2x implied present values of the per share merger consideration of $86.92-$136.70; 2013 cash EPS-based values were $85.42 (23.5x), $93.29 (28.3x) and $101.46 (33.2x), premiums of 34.4%, 46.8% and 59.7%. | $86.92–$136.70 |
| Synergy Financial Analysis | Discounted projected synergies of $25 million in 2012, $100 million in 2013 and full run-rate pre-tax synergies of $100 million/$150 million thereafter at 8.75%, giving illustrative present values of approximately $750 million and $1,087 million. The aggregate premium paid to Catalyst holders of approximately $893 million represented 119% and 82% of those values. | — |
Transaction fee based on value of total consideration paid plus net debt, approximately $25 million using SXC's April 17, 2012 closing price; Catalyst may pay an additional discretionary advisory fee of up to $2.5 million; all contingent and payable upon consummation.
Opinion of Barclays to the acquirer board
Discounted cash flow assumptions
DCF without synergies $71.00-$87.00; DCF including synergies $96.00-$117.00. A parallel SXC DCF used an 8% discount rate (midpoint) and the same 11.0x-13.0x terminal multiples.
Selected public companies (4)
SXC Health Solutions Corp. · CVS Caremark Corp. · Express Scripts, Inc. (pro forma for the acquisition of Medco Health Solutions, Inc.) · Catalyst Health Solutions, Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| Cash P / 2012E EPS | 13.4x | 16.2x | 33.1x | 20.0x–30.0x | $54.00–$81.00 |
| Cash P / 2013E EPS | 11.9x | 13.1x | 27.5x | 18.0x–25.0x | $60.25–$83.75 |
Selected precedent transactions (10)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2011-07 | Medco Health Solutions, Inc. | Express Scripts, Inc. | — |
| 2011-03 | Walgreens Health Initiative, Inc. | Catalyst | — |
| 2009-04 | WellPoint NextRx | Express Scripts, Inc. | — |
| 2007-07 | Option Care, Inc. | Walgreen Co. | — |
| 2007-03 | Caremark Rx, Inc. | CVS Corporation | — |
| 2006-12 | Caremark Rx, Inc. | Express Scripts, Inc. | — |
| 2005-07 | Priority Healthcare Corporation | Express Scripts, Inc. | — |
| 2005-02 | Accredo Health, Inc. | Medco Health Solutions, Inc. | — |
| 2003-09 | AdvancePCS | Caremark Rx, Inc. | — |
| 2002-02 | National Prescription Administrators, Inc. | Express Scripts, Inc. | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / LTM EBITDA | 11.1x | 14.0x | 16.4x | 12.0x–16.0x | $49.75–$67.75 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Transaction Premium Analysis | Premiums paid in the selected precedent transactions relative to one-day prior prices ranged from 8% (low) to 43% (high) with a mean of 27%; Barclays applied a 25%-40% premium range to Catalyst's April 17, 2012 closing price. | $79.50–$89.00 |
| Relative Implied Value Analysis (implied exchange ratio) | DCF-based relative value comparison produced implied exchange ratios of 0.8734x-1.0905x versus the 1.0094x exchange ratio of the merger consideration (as adjusted for the cash component). A contribution analysis based on 2012E/2013E EBITDA and cash net income produced implied exchange ratios of 0.9569x-1.1104x (Catalyst contribution 44%-47%). | — |
SXC paid Barclays a $1,000,000 opinion fee upon delivery of the opinion. Barclays subsequently acted as joint book-running manager on SXC's equity offering (approx. $5.4 million of underwriting discounts) and anticipates arranging/providing debt financing for aggregate fees of approximately $6.5 million.
Opinion of J.P. Morgan to the acquirer board
Discounted cash flow assumptions
Catalyst stand-alone $69.50-$93.25; Catalyst with synergies $96.00-$128.00 (implied synergy value $26.56-$34.68 per share). SXC stand-alone implied equity value per share $73.25-$95.25. Assumed Catalyst net debt and minority interest of $202 million and SXC net cash of $146 million as of June 30, 2012.
Selected public companies (2)
CVS Caremark Corp. · Express Scripts, Inc. (pro forma for the acquisition of Medco Health Solutions, Inc.)
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| FV / 2012E EBITDA | 7.7x | 10.2x | 12.6x | 13.0x–19.0x | $57.75–$86.25 |
| FV / 2013E EBITDA | 7.3x | 8.2x | 9.1x | 10.0x–15.0x | $47.25–$73.00 |
| P / 2012E EPS | 13.4x | 14.8x | 16.1x | 30.0x–38.0x | $59.75–$75.75 |
| P / 2013E EPS | 11.8x | 12.1x | 12.4x | 22.0x–30.0x | $53.00–$72.50 |
Selected precedent transactions (10)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2011-07 | Medco Health Solutions, Inc. | Express Scripts, Inc. | — |
| 2011-03 | Walgreens Health Initiative, Inc. | Catalyst | — |
| 2009-04 | WellPoint NextRx | Express Scripts, Inc. | — |
| 2007-07 | Option Care, Inc. | Walgreen Co. | — |
| 2007-03 | Caremark Rx, Inc. | CVS Corporation | — |
| 2006-12 | Caremark Rx, Inc. | Express Scripts, Inc. | — |
| 2005-07 | Priority Healthcare Corporation | Express Scripts, Inc. | — |
| 2005-02 | Accredo Health, Inc. | Medco Health Solutions, Inc. | — |
| 2003-09 | AdvancePCS | Caremark Rx, Inc. | — |
| 2002-02 | National Prescription Administrators, Inc. | Express Scripts, Inc. | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| FV / LTM EBITDA | 11.2x | 14.2x | 16.4x | 12.0x–16.0x | $50.25–$68.25 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Implied Exchange Ratio Analysis | Based on the public trading multiples implied per share values, implied exchange ratios ranged from 0.2593 to 1.0837 depending on the metric; based on DCF values, 0.4357-0.8908 without synergies and 0.7139-1.3652 with synergies. | — |
Aggregate fee of $13,000,000; $2,000,000 earned upon delivery of the opinion and $11,000,000 payable upon completion of the merger. J.P. Morgan also acted as joint book-running manager on SXC's equity offering (approx. $5.4 million of underwriting discounts) and anticipates arranging/providing debt financing for aggregate fees of approximately $17.4 million.
Management projections
| Projection year | Year 1 | Year 2 | Year 3 | CAGR |
|---|---|---|---|---|
| Revenue | $7.9B | $9.6B | $11B | 19.5% |
| Revenue growth | 21.8% | 20.3% | 18.7% | |
| EBITDA | $294M | $361M | $436M | 21.8% |
| EBITDA growth | 20.5% | 22.9% | 20.7% | |
| EBITDA margin | 4% | 4% | 4% | |
| Implied EV / EBITDA | 15.9x | 12.9x | 10.7x |
Year-1 growth is against LTM at announcement ($6.5B revenue, $244M EBITDA); later years are year over year.
SXC management prepared stand-alone unaudited prospective financial information for fiscal 2012-2014 (also providing 2015 and 2016 figures to its board and advisors): revenue of $6,930 million in 2012E rising to $8,719 million in 2014E, EBITDA of $254 million in 2012E rising to $369 million in 2014E, GAAP diluted EPS of $2.05 to $3.21 and adjusted EPS of $2.43 to $3.47. Catalyst management prepared forecasts for Catalyst for fiscal 2012-2015 (provided to SXC and its advisors) and extrapolated SXC's forecasts for 2015-2016. Barclays and J.P. Morgan extended both sets of forecasts through fiscal 2022 using extrapolations reviewed and approved by SXC management, and used SXC management estimates of synergies ($25 million in 2012, $100 million in 2013, full run-rate pre-tax of $100-$150 million thereafter per Catalyst management).
Process notes
Other Managed Care fairness opinions
- Coventry Health Care / Aetna 2012 · 8.9x EV/EBITDA
- AMERIGROUP / Wellpoint Healthcare Networks 2012 · 12.3x 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
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