Coventry Health Care acquired by Aetna: fairness opinion by Greenhill
Deal terms
$27.30 in cash plus 0.3885 of an Aetna common share per share of Coventry common stock; implied consideration value of $42.08 per share based on Aetna's $38.04 closing price on August 17, 2012 (deal negotiated on contemplated consideration of $42.00 per share). Cash paid in lieu of fractional shares.
Implied value per share by method vs. $27.30 offer
Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.
Opinion of Greenhill to the target board
Discounted cash flow assumptions
Unlevered after-tax free cash flows from July 1, 2012 through December 31, 2015 discounted to June 30, 2012; net debt (gross debt of $1,585 million less unregulated cash and investments of $936 million) subtracted; fully diluted share count of 134 million shares plus 8.6 million options at weighted average strike of $37.18.
Selected public companies (11)
Aetna Inc. · Cigna Corporation · Health Net, Inc. · UnitedHealth Group Incorporated · WellPoint, Inc. · Humana Inc. · Universal American Corp. · Amerigroup Corporation · Centene Corporation · Molina Healthcare, Inc. · WellCare Health Plans, Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| Equity Value / 2012E Net Income (IBES) | — | — | — | 8.0x–12.0x | $22.74–$33.93 |
| Equity Value / 2012E Net Income (Coventry Forecasts) | — | — | — | 8.0x–12.0x | $22.35–$33.35 |
| Equity Value / 2013E Net Income (IBES) | — | — | — | 7.5x–10.5x | $24.02–$33.48 |
| Equity Value / 2013E Net Income (Coventry Forecasts) | — | — | — | 7.5x–10.5x | $26.89–$37.42 |
Selected precedent transactions (13)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2012-07 | Amerigroup Corporation | WellPoint, Inc. | — |
| 2011-10 | HealthSpring, Inc. | Cigna Corporation | — |
| 2007-03 | Sierra Health Services, Inc. | UnitedHealth Group Incorporated | — |
| 2005-09 | WellChoice, Inc. | WellPoint, Inc. | — |
| 2005-07 | PacifiCare Health Systems, Inc. | UnitedHealth Group Incorporated | — |
| 2004-10 | First Health Group Corp. | Coventry Health Care, Inc. | — |
| 2004-09 | American Medical Security Group, Inc. | PacifiCare Health Systems, Inc. | — |
| 2004-04 | Oxford Health Plans, Inc. | UnitedHealth Group Incorporated | — |
| 2003-10 | Mid Atlantic Medical Services, Inc. | UnitedHealth Group Incorporated | — |
| 2003-10 | WellPoint, Inc. | Anthem, Inc. | — |
| 2003-06 | Cobalt Corporation | WellPoint, Inc. | — |
| 2002-04 | Trigon Healthcare, Inc. | Anthem, Inc. | — |
| 2001-10 | RightCHOICE Managed Care, Inc. | WellPoint, Inc. | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| Equity Value / NTM Net Income (all precedent transactions, median / mean 18.4x / 17.4x; core 16.9x / 16.7x) applied to NTM (from 6/30/12) net income - IBES | — | 18.4x | — | 13.5x–17.0x | $39.81–$49.81 |
| Equity Value / NTM Net Income applied to Coventry Forecasts | — | 16.9x | — | 13.5x–17.0x | $43.58–$54.48 |
| Equity Value / LTM Net Income (ending 6/30/12) | — | 18.8x | — | 15.0x–18.0x | $42.71–$50.99 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Sum-of-the-Parts Analysis (line of business EBITDA) | Applied EBITDA multiples to 2013E line of business EBITDA: Medicare $344mm at 5.0x-6.5x ($1,721-$2,237mm), Medicaid $92mm at 7.0x-8.0x ($645-$738mm), Commercial Risk/ASO & Other $475mm at 5.0x-6.0x ($2,373-$2,847mm), Workers' Comp Services & Network Rental $119mm at 6.0x-8.0x ($713-$951mm), less net debt. | $35.56–$45.05 |
| Sum-of-the-Parts Analysis (per member equity values) | Attributed equity value per member to each membership category as of 6/30/12: Commercial Risk (1,519k) $550-$750; Medicare Advantage (253k) $5,000-$7,500; Medicare Part D (1,494k) $350-$500; Medicaid (775k, excl. Kansas) $550-$750; ASO (1,083k) $250-$300; Workers' Comp Services & Network Rental valued on EBITDA basis ($713-$951mm). | $29.97–$41.59 |
| Premiums Paid Analysis - General M&A Transactions | 90 pending/completed U.S. change-in-control transactions announced since January 1, 2009 with transaction values between $3 billion and $10 billion; median 1-day premium 26.1%, median 1-month premium 32.2%. Applied 25.0%-35.0% premium range to Coventry closing price on unaffected date (8/14/12) and one month prior. | $40.20–$43.63 |
| Premiums Paid Analysis - Precedent Healthcare Services Transactions | Nine healthcare services transactions (Amerigroup/WellPoint, Lincare/Linde, Catalyst Health/SXC, HealthSpring/Cigna, PPD/Carlyle-Hellman & Friedman, Emdeon/Blackstone-H&F, EMSC/CD&R, Psychiatric Solutions/UHS, IMS Health/CPPIB-Leonard Green-TPG); median 1-day premium 41.2%, median 1-month premium 43.5%. Applied 40.0%-45.0% premium range. | $45.02–$46.86 |
| Premiums Paid Analysis - Precedent Managed Care Transactions (core) | Core precedent managed care transactions had a median premium to the closing share price one calendar month prior to announcement of 22.1%; applied 20.0%-30.0% premium range to Coventry closing price one month prior to the unaffected price date. | $38.59–$41.81 |
| Premiums Paid Analysis - Precedent Transactions vs. Industry Trading Multiple | Eight precedent managed care transactions; applied a 25.0%-45.0% premium range to the median trading multiple of equity value to CY2012E net income of the publicly traded Diversified/Commercial Companies (inclusive of Coventry) based on 8/17/12 closing prices. | $32.93–$38.07 |
| Historical Stock Trading Analysis | Implied premiums vs. reference prices as of the unaffected price date (8/14/12): closing price $32.32 (30.2%), one week prior $32.32 (30.2%), one month prior $32.16 (30.8%), 52-week high $35.57 (18.3%), 5-day avg $32.41 (29.8%), 10-day avg $32.34 (30.1%), 20-day avg $32.32 (30.2%), 30-day VWAP $32.30 (30.3%), 90-day VWAP $31.98 (31.6%). | — |
Transaction fee estimated at approximately $29,250,000, of which approximately $3,650,000 was paid in connection with delivery of the opinion and announcement of the merger, with the remainder contingent on completion of the merger. In prior two years Greenhill received a $4,000,000 transaction fee from Aetna for its acquisition of Medicity Inc. (completed January 2011).
Management projections
| Projection year | Year 1 | Year 2 | Year 3 | CAGR |
|---|---|---|---|---|
| Revenue | $15B | $19B | $24B | 24.5% |
| Revenue growth | 8.1% | 25.1% | 24.0% | |
| EBITDA | $1.0B | $1.3B | $1.6B | 22.7% |
| EBITDA growth | 5.1% | 27.4% | 18.2% | |
| EBITDA margin | 7% | 7% | 7% | |
| Implied EV / EBITDA | 8.4x | 6.6x | 5.6x |
Year-1 growth is against LTM at announcement ($14B revenue, $980M EBITDA); later years are year over year.
Coventry management prepared internal financial projections covering 2H 2012E through 2015E, provided to Aetna, the Coventry board and Greenhill. EBITDA was projected at $980 million (2012E), $1,030 million (2013E), $1,312 million (2014E) and $1,551 million (2015E), with net income of $453 million rising to $551 million over the same period. Unlevered free cash flow (EBITDA less corporate taxes, health insurer excise tax impact, working capital changes, capex and statutory capital investments), calculated for Greenhill's DCF but not provided to Aetna, was $333 million (2H 2012E), $680 million (2013E), $468 million (2014E) and $435 million (2015E). Management also prepared 2013E line-of-business EBITDA (Medicare $344mm, Medicaid $92mm, Commercial Risk/ASO & Other $475mm, Workers' Comp Services & Network Rental $119mm) for Greenhill's sum-of-the-parts analysis. For Aetna, Greenhill used publicly available Morgan Stanley analyst forecasts adjusted for the non-deductible health insurer excise tax.
Process notes
Other Managed Care fairness opinions
- AMERIGROUP / Wellpoint Healthcare Networks 2012 · 12.3x EV/EBITDA
- Catalyst Health Solutions / SXC Health Solutions 2012 · 19.1x 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