Dental Care Plus Group acquired by DentaQuest: fairness opinion by Mercer Capital
Announced March 12, 2019 · One-step merger · All cash ·
DEFM14A filed May 21, 2019
Managed Care Health Plans: Specialty
Enterprise value
$41.5M
equity $46.9M
EV / LTM EBITDA
10.4x
EBITDA $4.0M · 4% margin
EV / LTM revenue
0.37x
revenue $113M
DCF discount rate
12.5%–16.0%
Perpetuity growth and exit multiple
Deal terms
ConsiderationAll cash
Price per share$2514.74
Premium—
Premium basisNo public market exists for DCP's Common Shares beyond DCP's periodic repurchases at book value; implied total consideration equal to 276% of 12/31/2018 fully diluted book value
StructureOne-step merger
Termination fee$2.0M
Reverse termination fee$1.4M
Go-shopNone
Outside dateSeptember 30, 2019
FilingDEFM14A · EDGAR index
Implied value per share by method vs. $2514.74 offer
Precedent transactions — EV / 2018 EBITDA (excluding Cost Savings) $2291.00 – $2550.00
Precedent transactions — EV / 2018 EBITDA (including Cost Savings) $3120.00 – $3493.00
Discounted cash flow $1923.00 – $4484.00
Net Asset Value Analysis $1024.00 – $1132.00
Capitalization of NOPAT (Excluding Cost Savings) $1545.00 – $2022.00
Capitalization of NOPAT (Including Cost Savings) $2196.00 – $2943.00
Premiums Paid Analysis $1313.00 – $1463.00
Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.
Opinion of Mercer Capital to the target board
Delivered March 11, 2019 · Fee $0.1M ($0.0M contingent on closing), $0.1M on delivery of the opinion
Discounted cash flow assumptions
Discount rate12.5%–16.0%
BasisBuild-up: 2.94% risk-free (20-yr U.S. Treasuries) + managed care industry beta 0.92x times 5.50% equity risk premium + 3.48% small cap premium + 2.0%-3.0% company-specific risk premium; base rate 13.5% for standalone and sell-later scenarios (sensitized 12.5%-14.5%) and 15.0% for the Cost Savings scenario (sensitized 14.0%-16.0%)
Terminal valuePerpetuity growth and exit multiple
Perpetuity growth4.0%–6.0%
Exit multiple6.5x–7.5x EBITDA (terminal value multiples: 5.5x standalone, 7.0x sell later, 5.9x cost savings; sell later sensitized 6.5x-7.5x)
Projection period2019E-2022E
Projections usedDCP management projections (three scenarios: Standalone, Sell Later, Cost Savings Scenario)
Implied value per share$1923.00–$4484.00
Standalone: $30.0-$42.8 million ($1,923-$2,747 per common share equivalent) at 12.5%-14.5% discount rates and 4.0%-6.0% terminal growth. Sell Later: $44.8-$52.2 million ($2,878-$3,349) at 12.5%-14.5% discount rates and 6.5x-7.5x terminal EBITDA multiples. Cost Savings Scenario: $49.9-$69.9 million ($3,200-$4,484) at 14.0%-16.0% discount rates and 4.0%-6.0% terminal growth.
Selected precedent transactions (24)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| — | Superior Dental Care, Inc. | Medical Mutual of Ohio | — |
| — | Health Resources, Inc. | Paramount Care, Inc. | — |
| — | Fidelity & Guaranty Life | CF Corp / FGL US Holdings | — |
| — | Universal American Corp. | WellCare Health Plans, Inc. | — |
| — | Harbor Health Plan, Inc. | TRUSTED Health Plan, Inc. | — |
| — | H&J Capital/Starmount Life | Unum Group | — |
| — | Health Resources, Inc. | Hammond, Kennedy, Whitney & Co Inc. | — |
| — | StanCorp Financial Group Inc. | Meiji Yasuda Life Insurance Company | — |
| — | Health Net, Inc. | Centene Corporation | — |
| — | Concentra, Inc. | Welsh, Carson, Anderson & Stowe | — |
| — | Protective Life Corp | Dai-ichi Life Insurance Company, Ltd | — |
| — | CDMI, LLC | Magellan Rx Management, Inc. | — |
| — | Four Affiliated Park Avenue Companies | Hospitalist Management of New York, Inc | — |
| — | Coventry Health Care Inc. | Aetna Inc. | — |
| — | AMERIGROUP Corporation | Anthem, Inc. | — |
| — | HealthCare Partners, LLC | DaVita Inc. | — |
| — | Access Plans, Inc. | Affinity Insurance Services, Inc. | — |
| — | Delphi Financial Group, Inc. | Tokio Marine & Nichido Fire Ins Co., Ltd. | — |
| — | BNL Financial Corp. | Ameritas Life Insurance Corp. | — |
| — | HealthSpring Inc. | Cigna Corporation | — |
| — | HAP Midwest Health Plan, Inc. | Health Alliance Plan of Michigan, Inc. | — |
| — | America Service Group Inc. | Valitas Health Services, Inc. | — |
| — | Bravo Health, Inc. | HealthSpring Inc. | — |
| — | PacificSource Community Health Plans, Inc. | PacificSource Health Plans, Inc. | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / EBITDA - GF Data group (5 private health & medical insurance carrier targets, EV $25-$250mm) | — | 7.3x | — | — | — |
| EV / EBITDA - SNL/S&P Capital IQ group (24 managed care provider and dental plan targets; EV $16mm-$6.3bn, median $573mm); median 9.2x adjusted 10% downward to 8.3x | — | 9.2x | — | — | — |
| EV / 2018 EBITDA (excluding Cost Savings) | — | — | — | 7.3x–8.3x | $2291.00–$2550.00 |
| EV / 2018 EBITDA (including Cost Savings) | — | — | — | 7.3x–8.3x | $3120.00–$3493.00 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Net Asset Value Analysis | Adjusted reported book value of assets to market value less liabilities; range of value for DCP of $16.0 to $17.6 million. | $1024.00–$1132.00 |
| Capitalization of NOPAT (Excluding Cost Savings) | Capitalized 2018 NOPAT excluding Cost Savings using discount rate range of 13.0%-14.0%, steady-state growth of 4.0%-6.0%, implying NOPAT capitalization multiples of 10.1x-14.3x; range of value $24.1 to $31.5 million. | $1545.00–$2022.00 |
| Capitalization of NOPAT (Including Cost Savings) | Capitalized 2018 NOPAT including Cost Savings using the same 10.1x-14.3x multiples; range of value $34.2 to $45.9 million. | $2196.00–$2943.00 |
| Premiums Paid Analysis | Ten managed care/dental insurance transactions over the last ten years with observable premiums; median one-day, one-week and one-month premiums of 21%, 32% and 34%. Applied to fully diluted book value per common share equivalent of $1,089 at 12/31/2018, producing a range of value of $20.5 to $22.8 million. | $1313.00–$1463.00 |
| Summary of the Proposed Merger / implied transaction multiples | Total merger consideration of approximately $46.9 million ($3,010.89 per common share equivalent) implied 276% of 12/31/2018 fully diluted book value, 18.7x reported 2018 net income, 12.3x pro forma 2018 net income (all Cost Savings, 27.5% tax rate), 10.3x reported 2018 EBITDA and 7.1x pro forma 2018 EBITDA (based on $41.5 million merger consideration). | — |
| Process and Other Considerations | Noted Hilliard Lyons ran an extensive marketing process, that Mercer Capital had no role in setting the merger consideration, the Board's fiduciary termination right subject to a $2.0 million termination fee, and that the merger may better position DCP to execute its business plan with greater access to capital. | — |
DCP agreed to pay Mercer Capital a fee of $60,000 to provide its fairness opinion. No part of the fee is contingent upon the conclusion of its analysis or of the merger. Mercer Capital was retained by DCP once in 2018 to review another transaction that was not executed; no engagements by DentaQuest in the past three years. Hilliard Lyons acted as DCP's financial advisor for the marketing process but did not render an opinion.
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Management projections
| Projection year | Year 1 | Year 2 | Year 3 | Year 4 | CAGR |
|---|---|---|---|---|---|
| Revenue | $118M | $127M | $135M | $142M | 6.3% |
| Revenue growth | 5.0% | 7.5% | 6.1% | 5.4% | |
| EBITDA | $4.9M | $5.4M | $7.2M | $8.9M | 22.0% |
| EBITDA growth | 22.8% | 10.2% | 33.3% | 23.6% | |
| EBITDA margin | 4% | 4% | 5% | 6% | |
| Implied EV / EBITDA | 8.5x | 7.7x | 5.8x | 4.7x |
Year-1 growth is against LTM at announcement ($113M revenue, $4.0M EBITDA); later years are year over year.
Mercer Capital relied on DCP management's financial projections for fiscal years 2019 through 2022, which included estimated Cost Savings from reduced board fees, elimination of certain deferred compensation expense, and lower accounting/legal costs tied to SEC registration and reporting. Three DCF scenarios were run off these projections: Standalone (organic, no margin expansion beyond 2019, no Cost Savings, 5.5x terminal EBITDA), Sell Later (organic, no Cost Savings, 7.0x terminal EBITDA including Cost Savings) and a Cost Savings Scenario (margin expansion through 2022 plus Cost Savings, 5.9x terminal EBITDA). Specific projected revenue and EBITDA dollar figures were not disclosed; projections were not prepared for public disclosure.
Process notes
Private/non-listed Ohio company with no public trading market for its Common Shares (limited market from DCP's periodic repurchases at book value). Hilliard Lyons acted as DCP's financial advisor and ran the marketing process but did not deliver a fairness opinion; Mercer Capital was engaged March 1, 2019 solely to deliver the fairness opinion and had no involvement in negotiating the consideration. Mercer Capital rendered an oral opinion on March 5, 2019 and affirmed it (subsequently confirmed in writing) at the March 11, 2019 board meeting; the agreement was signed March 12, 2019. Mercer's March 5 analysis used a then-estimated $8.0 million special dividend, later revised to approximately $7.7 million. Consideration is structured as $41.5 million merger consideration with closing adjustments plus a special dividend funded by an extraordinary dividend from insurance subsidiary Dental Care Plus, Inc., subject to Ohio Department of Insurance approval. The transaction multiple note lists book value at both 276% and 222% (apparent duplication/typo in the filing).
Other Managed Care fairness opinions
- WellCare Health Plans / Centene 2019 · 14.5x EV/EBITDA
- Express Scripts Holding / Cigna 2018 · 11.6x EV/EBITDA
- Magellan Health / Centene 2021 · 15.6x EV/EBITDA
- Aetna / CVS Health 2017 · 12.1x EV/EBITDA
- Apollo Medical Holdings / Network Medical Management 2016
- Universal American / WellCare Health Plans 2016 · 9.3x EV/EBITDA