Fairness opinions › Physician Groups › 2011

Continucare acquired by Metropolitan Health Networks: fairness opinion by UBS and Barrington Research and Morgan Joseph TriArtisan

Announced June 27, 2011 · One-step merger · Cash and stock · DEFM14A filed July 21, 2011

Physician Groups Primary Care

Enterprise value

$416M

EV / LTM EBITDA

9.2x

EBITDA $45.0M · 14% margin

EV / LTM revenue

1.25x

revenue $333M

DCF discount rate

11.5%–12.5%

Deal terms

ConsiderationCash and stock

Price per share$6.25

Premium—

Premium basis—

StructureOne-step merger

Termination fee$12.0M

Reverse termination fee$12.0M

Go-shopNone

Outside dateNovember 1, 2011

FilingDEFM14A · EDGAR index

Each share of Continucare common stock converted into the right to receive $6.25 in cash, without interest, plus 0.0414 of a share of Metropolitan common stock (fixed exchange ratio); cash in lieu of fractional shares. Continucare stock options cashed out at $6.45 less exercise price.

Opinion of UBS to the target board

Delivered June 26, 2011

Opinion section for UBS not included in the sliced text; fee details not provided.

Opinion of Barrington Research to the target board

Opinion of Morgan Joseph TriArtisan to the acquirer board

Delivered June 26, 2011 · Fee $5.4M ($4.4M contingent on closing), $1.0M on delivery of the opinion

Discounted cash flow assumptions

Discount rate11.5%–12.5%

BasisContinucare weighted average cost of capital

Terminal valueExit multiple

Perpetuity growth—

Exit multiple5.0x–6.0x CY2015E EBITDA

Projection period2011E-2015E

Projections usedSupplemented CNU Forecast

Implied value per share$6.71–$7.58

DCF of Continucare. A separate DCF including $5 million per year of pre-tax annual cost savings through 2015 implied $7.09 to $8.01 per share. A DCF of Metropolitan used discount rates of 12.0%-13.0% (Metropolitan WACC), CY2015E EBITDA exit multiples of 4.5x-5.5x on 2011-2015 projections, implying $6.98 to $7.91 per Metropolitan share.

Selected public companies (14)

HealthSpring, Inc. · Humana Inc. · Triple-S Management Corporation · AMERIGROUP Corporation · Centene Corporation · Molina Healthcare, Inc. · Aetna Inc. · CIGNA Corporation · Coventry Health Care, Inc. · Health Net, Inc. · UnitedHealth Group Incorporated · WellPoint, Inc. · Continucare Corporation (CNU) · Metropolitan Health Networks, Inc. (MDF)

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
Medicare Advantage peers: EV / 2011E EBITDA	3.0x	5.0x	7.7x	—	—
Medicare Advantage peers: EV / 2012E EBITDA	2.8x	5.0x	7.1x	—	—
Medicare Advantage peers: P / 2011E Earnings	10.5x	11.4x	12.1x	—	—
Medicare Advantage peers: P / 2012E Earnings	9.0x	10.8x	11.2x	—	—
Medicaid peers: EV / 2011E EBITDA	5.8x	8.1x	8.6x	—	—
Medicaid peers: EV / 2012E EBITDA	5.2x	7.7x	7.9x	—	—
Medicaid peers: P / 2011E Earnings	14.4x	16.0x	16.7x	—	—
Medicaid peers: P / 2012E Earnings	14.2x	14.4x	15.0x	—	—
Multi-Line peers: EV / 2011E EBITDA	3.1x	6.9x	9.6x	—	—
Multi-Line peers: EV / 2012E EBITDA	3.0x	6.7x	10.4x	—	—
Multi-Line peers: P / 2011E Earnings	9.6x	11.3x	15.7x	—	—
Multi-Line peers: P / 2012E Earnings	9.2x	10.1x	10.9x	—	—
Continucare implied equity value per share from selected companies analysis	—	—	—	—	$5.54–$7.15
Metropolitan implied equity value per share from selected companies analysis	—	—	—	—	$6.09–$7.22
Continucare (street estimates): EV / 2011E EBITDA	—	5.4x	—	—	—
Continucare (street estimates): P / 2011E Earnings	—	10.8x	—	—	—
Metropolitan (street estimates): EV / 2011E EBITDA	—	4.2x	—	—	—
Metropolitan (street estimates): P / 2011E Earnings	—	7.6x	—	—	—

Selected precedent transactions (4)

Date	Target	Acquirer	Multiple
2010-10-26	Windsor Health Group, Inc.	Munich Re	—
2010-08-15	Prospect Medical Holdings Inc.	Leonard Green & Partners	—
2007-08-09	Leon Medical Centers Health Plans, Inc.	Healthspring Inc.	—
2007-07-06	Vista Healthplan, Inc.	Coventry Health Inc.	—

Multiple	Low	Median	High	Range applied	Implied per share
Transaction Value / LTM EBITDA	4.2x	7.0x	10.2x	—	$5.15–$6.53

Other analyses

Analysis	Summary	Implied per share
Discounted Cash Flow Analysis — With Synergies (Continucare)	Supplemented CNU Forecast including $5.0 million per year of pre-tax annual cost savings through 2015; discount rates 11.5%-12.5%; terminal values at 5.0x-6.0x FY2015 EBITDA.	$7.09–$8.01
Discounted Cash Flow Analysis (Metropolitan)	Metropolitan projections for CY2011-2015; discount rates 12.0%-13.0% based on Metropolitan's WACC; terminal values at 4.5x-5.5x CY2015 EBITDA.	$6.98–$7.91
52-Week Trading Range Analysis (Metropolitan)	Metropolitan common stock closing price high of $5.26 and closing low of $3.44 over June 24, 2010 to June 24, 2011.	$3.44–$5.26
Pro Forma Trading Range Analysis (Metropolitan)	Analyzed pro forma 2012 EBITDA and net income of the combined company applying comparable company trading multiples; adjusted by Metropolitan's pro forma ownership.	$5.81–$8.03
Leveraged Buyout Analysis (Continucare)	Supplemented CNU Forecast plus $5.0 million of pre-tax annual savings through 2015; exit in CY2015 at 7.0x-9.0x CY2015 EBITDA; required equity IRRs of 22.5%-27.5%.	$6.15–$7.13
Premium Paid Analysis	Premiums paid in public healthcare transactions announced since June 16, 2010 with enterprise values/purchase prices of $250-$750 million; mean premiums across all transactions of 34.1% (1-day), 35.1% (7-day), 38.9% (30-day) and 40.7% (90-day), applied to various Continucare price benchmarks.	$6.32–$6.81

$1.0 million paid upon delivery of the opinion; additional $5.4 million payable on completion of the merger against which the opinion fee is credited. If the merger is not consummated but Continucare pays break-up/lock-up fees to Metropolitan, Morgan Joseph TriArtisan receives 20% of such fees (less certain deductions). Since 2006 received approximately $800,000 in aggregate fees from Metropolitan for prior services.

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Management projections

Projection year	Year 1	Year 2	Year 3	Year 4	Year 5	CAGR
Revenue	$383M	$416M	$447M	$472M	$493M	6.5%
Revenue growth	15.0%	8.6%	7.5%	5.6%	4.4%
EBITDA	$57.0M	$64.0M	$68.0M	$72.0M	$75.0M	7.1%
EBITDA growth	26.7%	12.3%	6.3%	5.9%	4.2%
EBITDA margin	15%	15%	15%	15%	15%
Implied EV / EBITDA	7.3x	6.5x	6.1x	5.8x	5.5x

Year-1 growth is against LTM at announcement ($333M revenue, $45.0M EBITDA); later years are year over year.

Morgan Joseph TriArtisan used the "Supplemented CNU Forecast" for Continucare for calendar years 2011 through 2015 in its DCF and LBO analyses, and Metropolitan management projections for Metropolitan for calendar years 2011 through 2015. A synergy case added $5.0 million per year of pre-tax cost savings through 2015 projected by Continucare management. Specific revenue and EBITDA dollar figures were not disclosed in the sections provided.

Process notes

Three financial advisors were involved: UBS Securities LLC and Barrington Research Associates, Inc. each delivered opinions dated June 26, 2011 to the Continucare Board (their detailed analyses were not included in the sliced opinion section, which covered only Metropolitan's advisor), and Morgan Joseph TriArtisan LLC delivered an opinion to the Metropolitan (acquirer) Board. UBS's opinion excluded Continucare shareholders who executed voting agreements with Metropolitan ("excluded holders"). On July 1, 2011, Morgan Joseph TriArtisan discovered immaterial computational errors that revised its valuation ranges downward by 1.0% to 5.8%; revised analyses were presented to the Metropolitan Board on July 8, 2011 and the opinion was orally reconfirmed as of June 26, 2011. Continucare termination fee is $9 million in one circumstance and $12 million in others, plus up to $1.5 million expense reimbursement; Metropolitan reverse fee is $12 million plus up to $1.5 million expenses. Merger was conditioned on receipt of debt financing (approximately $355 million committed, ~$330 million expected outstanding at closing). Continucare shareholders were to own approximately 5.8% of the combined company.

Other Physician Groups fairness opinions

Emergency Medical Services / Clayton, Dubilier & Rice 2011 · 10.2x EV/EBITDA
Metropolitan Health Networks / Humana 2012 · 8.2x EV/EBITDA
Nighthawk Radiology Holdings / Virtual Radiologic 2010 · 12.9x EV/EBITDA
Virtual Radiologic / Providence Equity Partners 2010 · 9.5x EV/EBITDA
IPC Healthcare / TeamHealth 2015 · 22.5x EV/EBITDA
Network Medical Management / Apollo Medical Holdings 2016 · 9.5x EV/EBITDA

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