Covance acquired by Laboratory Corporation of America: fairness opinion by Goldman Sachs
Deal terms
$75.76 in cash plus 0.2686 shares of LabCorp common stock per Covance share; implied $105.12 per share based on LabCorp closing price of $109.29 on October 31, 2014 ($106.88 based on $115.86 close on January 13, 2015). Cash in lieu of fractional shares. Covance holders to own ~15.5% of LabCorp post-closing.
Implied value per share by method vs. $75.76 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
Present value per share as of September 30, 2014; terminal values assumed terminal-year capital expenditure equal to 105% of depreciation and amortization; net cash of approximately $455 million as of September 30, 2014 added to present values.
Selected public companies (6)
Charles River Laboratories International, Inc. · ICON plc · PAREXEL International Corporation · Quintiles Transnational Holdings Inc. · Laboratory Corporation of America Holdings · Quest Diagnostics Incorporated
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / 2014E EBITDA (CRO peers) | 9.1x | 12.6x | 13.3x | — | — |
| EV / 2014E EBITDA (LabCorp peers median) | — | 9.7x | — | — | — |
| Price / 2014E EPS (CRO peers) | 15.6x | 20.5x | 22.3x | — | — |
| Price / 2014E EPS (LabCorp peers median) | — | 15.9x | — | — | — |
| Price / 2015E EPS (CRO peers) | 14.6x | 18.1x | 19.9x | — | — |
| Price / 2015E EPS (LabCorp peers median) | — | 14.8x | — | — | — |
| P/E/G 2015E (CRO peers) | 0.9x | 1.3x | 1.9x | — | — |
| P/E/G 2015E (LabCorp peers median) | — | 1.5x | — | — | — |
Selected precedent transactions (10)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2006-05 | Charles River Laboratories International, Inc.—Phase II-IV Clinical Services Business | Kendle International Inc. | — |
| 2007-02 | BioReliance Corporation | Avista Capital Holdings, L.P.; Avista Capital Partners, L.P. | — |
| 2007-07 | PRA International | Genstar Capital, LLC | — |
| 2007-12 | Quintiles Transnational Corp. | 3i Group plc; Bain Capital Private Equity; Temasek Holdings; TPG Capital, L.P. | — |
| 2009-02 | PharmaNet Development Group, Inc. | JLL Partners; JLL Partners Fund V, L.P.; JLL Partners VI, L.P. | — |
| 2010-05 | InVentiv Health, Inc. | Thomas H. Lee Partners, L.P. | — |
| 2010-08 | INC Research, LLC | Avista Capital Holdings, L.P.; Ontario Teachers' Pension Plan | — |
| 2011-05 | Kendle International Inc. | INC Research, LLC | — |
| 2011-11 | Pharmaceutical Product Development, LLC | Carlyle Partners V, L.P.; Hellman & Friedman Capital Partners VII, L.P.; Hellman & Friedman LLC; The Carlyle Group LP | — |
| 2013-06 | PRA International | Kohlberg Kravis Roberts & Co. LP | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / LTM EBITDA | 6.9x | 11.4x | 16.8x | — | — |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Implied Transaction Premia and Multiples Analysis | Implied value of $105.12 per share; equity value ~$6.081 billion, enterprise value ~$5.627 billion. Premia: (0.9)% to 52-week high, 33.2% to 1-month closing average, 27.6% to 3-month closing average, 18.1% to 1-year closing average. EV/EBITDA: 13.2x LTM (as of 9/30/2014), 12.6x 2014E, 11.9x 2015E. Price/EPS: 22.8x 2015E, 19.3x 2016E. | — |
| Illustrative Present Value of Future Stock Price Analysis | Applied P/E multiples of 17.0x to 20.0x to Covance estimated EPS for 2015-2019 per Covance management forecasts (reflecting share repurchases in 2015, 2016 and 2018), discounted at 8.3% (Covance cost of equity), yielding present values per share of $76.68 to $116.15. | $76.68–$116.15 |
| Historical Merger Premium Analysis | Analyzed 315 U.S. merger transactions announced since January 1, 2009 with total transaction value of $1-$10 billion and more than 50% cash consideration, including 63 in healthcare. Median 1-day premium: all industries 26%, healthcare 30%; by year 2009 32%, 2010 25%, 2011 24%, 2012 24%, 2013 26%, 2014 YTD 23%. | — |
Fee based on aggregate value of the aggregate consideration to be paid, contingent upon consummation; approximately $40 million based on LabCorp share price as of close of trading on November 19, 2014. Expense reimbursement and indemnification also agreed. Goldman received ~$0.5 million from LabCorp for financial advisory/underwriting services in the two years ended November 2, 2014.
Management projections
| Projection year | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | CAGR |
|---|---|---|---|---|---|---|
| Revenue | $2.7B | $3.0B | $3.3B | $3.6B | $4.0B | 9.9% |
| Revenue growth | 7.2% | 8.3% | 10.7% | 10.3% | 10.3% | |
| EBITDA | $474M | $507M | $562M | $620M | $685M | 9.6% |
| EBITDA growth | 6.3% | 7.0% | 10.8% | 10.3% | 10.5% | |
| EBITDA margin | 17% | 17% | 17% | 17% | 17% | |
| Implied EV / EBITDA | 11.9x | 11.1x | 10.0x | 9.1x | 8.2x |
Year-1 growth is against LTM at announcement ($2.5B revenue, $446M EBITDA); later years are year over year.
Goldman Sachs relied on the "Covance management forecasts" — internal financial analyses and forecasts for Covance and forecasts for LabCorp prepared by Covance management (LabCorp did not provide forecasts, so Covance management developed LabCorp forecasts from research analyst reports, industry and diligence information) — plus operating synergies projected by Covance and LabCorp managements. Covance estimates covered 2014 through 2019 (EPS estimates for 2015-2019 and unlevered free cash flows from Q4 2014 through 2019), and took into account share repurchases in 2015, 2016 and 2018. Specific revenue/EBITDA dollar figures were not shown in the sliced sections; implied multiples of the merger consideration were 12.6x 2014E EBITDA, 11.9x 2015E EBITDA, 22.8x 2015E EPS and 19.3x 2016E EPS.
Process notes
Other Pharmaceutical Services fairness opinions
- Patheon / JLL Partners 2013 · 12.7x EV/EBITDA
- Quintiles / IMS Health 2016 · 10.8x EV/EBITDA
- IMS Health / Quintiles 2016 · 13.5x EV/EBITDA
- eResearch Technology / Genstar Capital 2012 · 7.7x EV/EBITDA
- Albany Molecular Research / Carlyle Group / GTCR 2017 · 11.5x EV/EBITDA
- Parexel International / Pamplona Capital Management 2017 · 13.9x EV/EBITDA
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