Fairness opinions › Medical Devices and Supplies › 2017

Exactech acquired by TPG: fairness opinion by J.P. Morgan

Announced December 4, 2017 · Going-private · All cash · DEFM14A filed January 16, 2018
Medical Devices and Supplies Medical Devices
Enterprise value
$737M
EV / LTM EBITDA
15.0x
EBITDA $49.0M · 18% margin
EV / LTM revenue
2.73x
revenue $270M
DCF discount rate
8.5%–9.5%
Perpetuity growth

Deal terms

ConsiderationAll cash
Price per share$49.25
Premium—
Premium basisClosing share price of $32.00 on October 20, 2017, the trading day immediately preceding execution of the Original Merger Agreement (used as reference by J.P. Morgan)
StructureGoing-private
Termination fee$25.8M
Reverse termination fee—
Go-shopNone
Outside date—
FilingDEFM14A · EDGAR index

Implied value per share by method vs. $49.25 offer

Selected companies — FV / 2018E EBITDA $33.25 – $51.00
Precedent transactions — FV / LTM EBITDA (as of October 31, 2017) $29.50 – $43.50
Discounted cash flow $23.00 – $33.25

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

Opinion of J.P. Morgan to the target board

Delivered December 2, 2017 · Fee $11.0M ($9.0M contingent on closing), $2.0M on delivery of the opinion

Discounted cash flow assumptions

Discount rate8.5%–9.5%
BasisJ.P. Morgan's analysis of the weighted-average cost of capital of the Company
Terminal valuePerpetuity growth
Perpetuity growth2.5%–3.5%
Exit multiple—
Projection period2017E-2023E
Projections usedCompany management 'base case' projections
Implied value per share$23.00–$33.25

Unlevered free cash flows for fiscal years 2018 through 2023 and terminal values discounted to present value as of December 31, 2017 over a seven-year period ending in 2023.

Selected public companies (9)

Globus Medical, Inc. · NuVasive, Inc. · Wright Medical Group N.V. · CONMED Corporation · Orthofix International N.V. · K2M Group Holdings, Inc. · RTI Surgical, Inc. · ConforMIS, Inc. · SeaSpine Holdings Corporation

MultiplePeer lowPeer medianPeer highRange appliedImplied per share
FV / 2018E EBITDA9.6x—13.8x 9.0x–14.0x $33.25–$51.00

Selected precedent transactions (7)

DateTargetAcquirerMultiple
2017-02Johnson & Johnson's Codman Neurosurgery businessIntegra LifeSciences Holdings Corporation9.1x FV/LTM EBITDA
2016-10Hospira's Infusion Systems businessICU Medical Inc.13.3x FV/LTM EBITDA
2014-02ArthroCare CorporationSmith & Nephew plc16.9x FV/LTM EBITDA
2013-07SystagenixKinetic Concepts, Inc.12.1x FV/LTM EBITDA
2013-06Wright Medical Group, Inc.'s OrthoRecon businessMicroPort Medical B.V.9.3x FV/LTM EBITDA
2012-08Kinetic Concepts Inc.'s Therapeutic Support Services businessGetinge AB5.7x FV/LTM EBITDA
2012-05Kensey Nash CorporationRoyal DSM10.7x FV/LTM EBITDA
MultipleLowMedianHighRange appliedImplied per share
FV / LTM EBITDA (as of October 31, 2017)5.7x—16.9x 9.0x–13.5x $29.50–$43.50

Other analyses

AnalysisSummaryImplied per share
Reference share price comparisonJ.P. Morgan compared each analysis range to the Company's closing share price of $32.00 on October 20, 2017 (the Nasdaq trading day immediately preceding execution of the Original Merger Agreement) and to the proposed merger consideration of $49.25 per share.—

J.P. Morgan received a $2 million fee payable upon the earlier of public announcement of the proposed merger or delivery of its opinion, plus an additional fee of approximately $9 million payable upon closing. J.P. Morgan may also receive a fee if the Company receives a break-up fee. Expense reimbursement and indemnification provided. Engagement letter dated October 13, 2017.

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Management projections

Projection yearYear 1Year 2Year 3Year 4Year 5CAGR
Revenue$300M$326M$354M$384M$417M8.6%
Revenue growth11.1%8.7%8.6%8.5%8.6%
EBITDA$52.0M$56.0M$61.0M$68.0M$75.0M9.6%
EBITDA growth6.1%7.7%8.9%11.5%10.3%
EBITDA margin17%17%17%18%18%
Implied EV / EBITDA14.2x13.2x12.1x10.8x9.8x

Year-1 growth is against LTM at announcement ($270M revenue, $49.0M EBITDA); later years are year over year.

Company management prepared non-public unaudited forecasts in Q2/Q3 2017, including a "base case" and an illustrative "upside case"; only the base case was deemed reliable and material and was relied on by the Board and J.P. Morgan. The base case covers 2017E-2023E: revenue of $270mm in 2017E growing to $452mm in 2023E (approximately 9% companywide CAGR), EBITDA of $49mm in 2017E rising to $83mm in 2023E, diluted EPS of $1.10 to $2.15, and free cash flow of ($9mm) in 2017E to $14mm in 2023E. Key assumptions included segment revenue CAGRs of 10% (Extremities), 8% (Knee) and 9% (Hip) for 2018-2023, average annual selling price declines of 3%, and capital expenditures of 10-18% of sales during 2018-2020 normalizing to ~9.6% during 2021-2023.

Process notes

Sole fairness opinion from J.P. Morgan to the Exactech Board, rendered orally and in writing on December 2, 2017 on the amended $49.25 per share price. Deal history: TPG initially indicated $39.00 per share, then a dual-price proposal of $41.25 (with go-shop) or $42.00 (no go-shop); the Board agreed to negotiate at $42.00 with no go-shop. After signing of the Original Merger Agreement, a third party ("Party A") submitted an Alternative Transaction Proposal, which led to the increased $49.25 per share price. Certain management shareholders (including Mr. Binder) held Rollover Shares; a Schedule 13E-3 was filed, indicating a going-private transaction. J.P. Morgan disclosed extensive prior relationships with TPG, having been paid 15x-20x the amount of its Exactech fee for TPG-related engagements in the prior two years. Notably, J.P. Morgan's DCF range ($23.00-$33.25) was well below the merger consideration.

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