Fairness opinions › Digital / HealthTech › 2018

Connecture acquired by Francisco Partners: fairness opinion by Houlihan Lokey

Announced January 5, 2018 · Going-private · All cash · DEFM14A filed February 12, 2018
Digital / HealthTech Insurance Marketplace
Enterprise value
$40.8M
EV / LTM EBITDA
—
EBITDA $-1.4M · -2% margin
EV / LTM revenue
0.53x
revenue $76.5M
DCF discount rate
18.0%–22.0%
Exit multiple

Deal terms

ConsiderationAll cash
Price per share$0.35
Premium—
Premium basis—
StructureGoing-private
Termination fee$2.0M
Reverse termination fee—
Go-shop45 days
Outside dateJune 4, 2018
FilingDEFM14A · EDGAR index

Implied value per share by method vs. $0.35 offer

Selected companies — EV / LTM GAAP Revenue (selected companies, EV < $500mm) $-1.04 – $0.51
Selected companies — EV / FY2017E GAAP Revenue (selected companies, EV < $500mm) $-1.10 – $0.42
Selected companies — EV / FY2018E GAAP Revenue (selected companies, EV < $500mm) $-1.12 – $0.39
Discounted cash flow $-1.02 – $0.44

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

Opinion of Houlihan Lokey to the special committee

Delivered January 4, 2018 · Fee $0.7M ($0.2M contingent on closing)

Discounted cash flow assumptions

Discount rate18.0%–22.0%
Basisselected discount rate range
Terminal valueExit multiple
Perpetuity growth—
Exit multiple1.3x–1.8x FY2023E billings
Projection period2018E-2023E
Projections usedConnecture management going concern projections (authorized by the Special Committee)
Implied value per share$-1.02–$0.44

Present values calculated as of December 31, 2017; assumed no taxes payable during the forecast period due to NOL utilization. Negative implied figures equate to zero equity value.

Selected public companies (16)

Castlight Health, Inc. · eHealth, Inc. · Health Insurance Innovations, Inc. · Hooper Holmes, Inc. · NantHealth, Inc. · Orion Health Group Limited · Streamline Health Solutions, Inc. · athenahealth, Inc. · Benefitfocus, Inc. · Care.com, Inc. · HealthEquity, Inc. · HMS Holdings Corp. · Inovalon Holdings, Inc. · Medidata Solutions, Inc. · Omnicell, Inc. · Vocera Communications, Inc.

MultiplePeer lowPeer medianPeer highRange appliedImplied per share
EV / LTM GAAP Revenue (selected companies, EV < $500mm)0.7x1.4x4.6x 1.0x–1.5x $-1.04–$0.51
EV / FY2017E GAAP Revenue (selected companies, EV < $500mm)0.9x1.7x5.0x 1.0x–1.5x $-1.10–$0.42
EV / FY2018E GAAP Revenue (selected companies, EV < $500mm)0.8x1.6x3.5x 1.0x–1.5x $-1.12–$0.39
EV / LTM GAAP Revenue (selected informational companies, EV > $500mm)3.1x4.3x12.3x — —
EV / FY2017E GAAP Revenue (selected informational companies, EV > $500mm)2.9x4.0x11.7x — —
EV / FY2018E GAAP Revenue (selected informational companies, EV > $500mm)2.6x3.8x9.5x — —

Other analyses

AnalysisSummaryImplied per share
Selected informational companies analysis (for informational purposes)Reviewed EV/revenue multiples for nine health insurance IT companies with EVs greater than $500 million; no implied per share range derived.—
Historical trading data review (preliminary discussion materials)Reviewed current and historical market prices and trading volume, average daily trading values and VWAPs for periods from one trading day to 12 months ended December 11, 2017; noted the stock had declined from slightly less than $14.00 per share in April 2015 to $0.14 per share as of December 7, 2017.—

Aggregate fee of $700,000; a portion paid upon engagement, a portion payable upon delivery of the opinion (not contingent on consummation), and $200,000 contingent upon consummation of the Merger. Expense reimbursement and indemnification also provided.

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 yearYear 1CAGR
Revenue$76.5M—
Revenue growth0.0%
EBITDA$1.9M—
EBITDA growth—
EBITDA margin2%
Implied EV / EBITDA21.5x

Year-1 growth is against LTM at announcement ($76.5M revenue, $-1.4M EBITDA); later years are year over year.

Management's going-concern projections (assuming Connecture obtains sufficient capital to fund operations and comply with bank covenants) were provided to Houlihan Lokey for fiscal years 2018 through 2023. Revenue was projected at $76.5 million in 2017E and $75.9 million in 2018E, with Adjusted EBITDA of $(1.4) million in 2017E and $1.9 million in 2018E. Unlevered after-tax free cash flow was projected to grow from $3.7 million in 2018E to $21.7 million in 2023E (assuming no cash taxes due to NOL utilization). Management also prepared weekly cash flow forecasts (week ending December 29, 2017 through March 30, 2018) and bankruptcy sensitivities that indicated substantially less favorable results than the going-concern case.

Process notes

Going-private transaction with Francisco Partners, an existing holder of Connecture Preferred Stock through the FP Investors, whose Preferred Stock is rolled over rather than cashed out. The Special Committee retained Houlihan Lokey, which delivered the sole fairness opinion on January 4, 2018; Raymond James was engaged only to run the 45-day go-shop process (ending February 18, 2018) and did not deliver an opinion. The company faced substantial going-concern doubt and potential covenant breaches; Houlihan Lokey relied on going-concern projections but noted management's bankruptcy sensitivities. Both the selected companies and DCF analyses produced implied per-share ranges whose low ends were negative (equating to zero equity value), with high ends of $0.39-$0.51 and $0.44 respectively versus $0.35 merger consideration. Termination fee is limited to reimbursement of Parent's documented out-of-pocket expenses up to $2.0 million. Debt financing commitment of $47 million from PNC Bank; equity commitment/guarantee from the FP Investors.

Other Digital / HealthTech fairness opinions

All Digital / HealthTech opinions → · Houlihan Lokey opinions