Express Scripts Holding acquired by Cigna: fairness opinion by Centerview Partners and Lazard
Deal terms
Each share of Express Scripts common stock converted into 0.2434 of a share of New Cigna common stock plus $48.75 in cash; implied ~$96.03 per share based on Cigna's $194.25 closing price on March 7, 2018. Each Cigna share converted into one New Cigna share. Express Scripts stockholders expected to hold ~36% of New Cigna; Cigna stockholders ~64%. Deal effected via double dummy structure with New Cigna holding company.
Implied value per share by method vs. $48.75 offer
Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.
Opinion of Centerview Partners to the target board
Discounted cash flow assumptions
Discounted to present value as of March 2, 2018. Centerview also performed DCF of Cigna using discount rates of 8.0%-9.5% and perpetuity growth rates of 2.0%-3.0% over 2018-2022, implying $178-$263 per Cigna share on the Cigna forecasts and $217-$320 on the Cigna Wall Street forecasts.
Selected public companies (9)
UnitedHealth Group Incorporated · CVS Health Corporation · Walgreens Boots Alliance, Inc. · McKesson Corporation · Cardinal Health, Inc. · AmerisourceBergen Corporation · Anthem · Humana Inc. · Centene Corporation
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| Express Scripts peers: EV / CY2018E Adjusted EBITDA | 7.4x | 8.8x | 13.3x | 8.0x–12.0x | $58.00–$95.00 |
| Express Scripts peers: Price / CY2018E Adjusted EPS | 10.7x | 11.8x | 18.2x | 10.5x–16.0x | $70.00–$104.00 |
| Cigna peers: EV / CY2018E Adjusted EBITDA | 10.2x | 12.1x | 13.3x | 10.0x–12.5x | $182.00–$232.00 |
| Cigna peers: Price / CY2018E Adjusted EPS | 14.1x | 16.8x | 19.8x | 15.0x–18.5x | $203.00–$250.00 |
Selected precedent transactions (4)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2015-03 | Catamaran Corporation | UnitedHealth Group Incorporated | 16.3x EV / LTM EBITDA |
| 2012-04 | Catalyst Health Solutions, Inc. | SXC Health Solutions Corp. | 19.6x EV / LTM EBITDA |
| 2011-07 | Medco Health Solutions, Inc. | Express Scripts, Inc. | 10.8x EV / LTM EBITDA |
| 2006-11 | Caremark Rx, Inc. | CVS Corporation | 13.5x EV / LTM EBITDA |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / LTM EBITDA (applied to Express Scripts CY2017 Adjusted EBITDA) | 10.8x | 14.9x | 19.6x | 11.0x–16.0x | $79.00–$121.00 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Relative Value Analysis (implied cash-adjusted exchange ratios) | Compared ranges of implied equity values for Express Scripts and Cigna, with Express Scripts value reduced by the $48.75 cash consideration, versus the 0.2434x transaction exchange ratio. Implied cash-adjusted exchange ratios: selected trading company EV/2018E EBITDA 0.041x-0.257x; selected trading company 2018E P/E 0.084x-0.270x; DCF (Cigna forecasts) 0.110x-0.341x; DCF (Cigna Wall Street forecasts) 0.091x-0.280x. | — |
| Historical Stock Price Trading Analysis (52-week) | Express Scripts 52-week low/high closing prices prior to March 2, 2018 of $56 to $83; Cigna 52-week range $144 to $227. Reference only, not a valuation methodology. | $56.00–$83.00 |
| Analyst Price Target Analysis | Sixteen Wall Street analyst reports as of March 7, 2018 showed price targets of $68 to $101 per Express Scripts share; $210 to $255 per Cigna share. | $68.00–$101.00 |
| Premia Paid Analysis | Cash-and-stock transactions since 2007 with public U.S. targets valued over $20 billion where target holders subsequently owned more than 20% of the pro forma company. 25th percentile/mean/75th percentile one-day premia of 18%/24%/29% and 30-day VWAP premia of 20%/27%/34%, versus the implied one-day premium of 31% and 30-day VWAP premium of 26%. | — |
| "Has"/"Gets" Analysis | Estimated pro forma market value for Express Scripts holders, including their participation in the Express Scripts projected synergies ($5.1 billion using a multiple-based synergy value), of approximately $54.5 billion, a 32% premium to the standalone value on March 7, 2018 and approximately $13.2 billion in incremental value. | — |
| Accretion/Dilution Analysis | Estimated pro forma accretion to Cigna holders of 16%, 19%, 22% and 22% for 2019-2022, with pro forma debt-to-capitalization of 40%, 36%, 34% and 32%. | — |
| Value Creation Analysis | By 2021, hypothetical illustrative future value of the merger consideration implied $137-$147 per share versus a standalone Express Scripts value of $98; Cigna analysis implied $316-$357 per share versus a standalone value of $293. | $137.00–$147.00 |
Estimated aggregate fee of approximately $58 million (estimated as of May 8, 2018), calculated as a percentage of the Express Scripts merger consideration at closing; $7 million payable upon rendering of opinion and approximately $51 million contingent upon consummation. Centerview received $2 million from Express Scripts in prior two years for advising on sale of UBC to Avista Capital Partners in 2017; no compensation from Cigna in prior two years.
Opinion of Lazard to the target board
Discounted cash flow assumptions
Discounted to present value as of March 31, 2018. Lazard also performed DCFs of Cigna for 2018-2022 using discount rates of 8.0%-9.0% and perpetuity growth of 1.5%-2.5%, implying $188-$260 per Cigna share on the Cigna forecasts and $219-$294 on the Cigna Wall Street forecasts.
Selected public companies (7)
Walgreens Boots Alliance, Inc. · McKesson Corporation · Cardinal Health, Inc. · AmerisourceBergen Corporation · UnitedHealth Group Incorporated · Anthem · Humana Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| Express Scripts peers: Price / CY2018E Adjusted EPS (applied to Core EPS) | 11.4x | 11.8x | 13.2x | 11.0x–13.0x | $73.00–$85.00 |
| Express Scripts peers: EV / CY2018E Adjusted EBITDA (applied to Core EBITDA) | 8.0x | 8.8x | 9.3x | 8.5x–10.0x | $63.00–$77.00 |
| Cigna peers: Price / CY2018E Adjusted EPS | 15.4x | 18.2x | 19.8x | 15.0x–16.0x | $203.00–$216.00 |
| Cigna peers: EV / CY2018E Adjusted EBITDA | 12.1x | 12.2x | 13.3x | 10.0x–12.5x | $182.00–$232.00 |
Selected precedent transactions (2)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2015-03 | Catamaran Corporation | UnitedHealth Group Incorporated | 13.1x EV / NTM Adjusted EBITDA |
| 2011-07 | Medco Health Solutions, Inc. | Express Scripts, Inc. | 10.2x EV / NTM Adjusted EBITDA |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / NTM Adjusted EBITDA (applied to Express Scripts NTM Core EBITDA) | 10.2x | — | 13.1x | 10.2x–13.1x | $78.47–$105.67 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Implied Adjusted Exchange Ratio Analysis | Implied exchange ratio reference ranges, with Express Scripts values adjusted downward by the $48.75 cash: DCF (Cigna forecasts) 0.1330x-0.3194x; DCF (Cigna Wall Street forecasts) 0.1176x-0.2750x; selected public companies (2018 Core EPS) 0.1099x-0.1779x; selected public companies (2018 Core EBITDA) 0.0601x-0.1534x, versus the 0.2434x stock consideration exchange ratio. | — |
| Analyst Price Targets (informational) | Undiscounted Wall Street analyst price targets as of March 7, 2018 of $68 to $101 per Express Scripts share and $210 to $255 per Cigna share. | $68.00–$101.00 |
| 52-Week Historical Trading Range (informational) | Low and high closing prices during the 52 weeks ended March 7, 2018 of approximately $57 and $82 per Express Scripts share; approximately $146 and $226 per Cigna share. | $57.00–$82.00 |
| Present Value of Future Share Price | Applied forward 2018 multiples of 9.5x to 12.5x (based on the 11.0x implied 2018 Core EPS multiple +/- 1.5x) to 2020-2022 estimated Core EPS, added back NPV of transitioning client contributions, and discounted to March 31, 2018 at a 10.5% equity discount rate, implying $58 to $79 per Express Scripts share. Comparable Cigna analysis used 13.4x-16.4x and an 8.9% discount rate, implying $195 to $249 per Cigna share. | $58.00–$79.00 |
| Illustrative Premia Paid Analysis | 22 transactions since 2012 involving U.S. targets (excluding financial institutions and real estate) with transaction value over $25 billion and a stock component, nine involving healthcare targets. 25th/75th percentile premia of 25%/35% (one day), 27%/46% (20-trading-day VWAP) and 20%/30% (52-week high), implying $92 to $109 per Express Scripts share. | $92.00–$109.00 |
| Value Creation Analysis | DCF-based methodology (using midpoint NPV of Express Scripts projected synergies of $11.8 billion) implied approximately 14% value creation to Express Scripts stockholders on the Cigna forecasts and 19% on the Cigna Wall Street forecasts; Adjusted EPS multiple-based methodology (using projected 2021 synergies of $1.2 billion and a 9.8% blended equity discount rate) implied approximately 31% to 53% value creation. | — |
Aggregate fee of $50 million, of which $10 million payable upon delivery of opinion and $40 million contingent upon completion. Lazard previously advised Express Scripts on its acquisition of eviCore healthcare; no fees received from Cigna in the three years prior to March 7, 2018.
Management projections
| Projection year | Year 1 | Year 2 | Year 3 | Year 4 | CAGR |
|---|---|---|---|---|---|
| Revenue | $86B | $89B | $91B | $94B | 3.0% |
| Revenue growth | 3.7% | 3.0% | 2.9% | 3.0% | |
| EBITDA | $5.5B | $5.7B | $5.8B | $6.0B | 2.7% |
| EBITDA growth | 3.0% | 2.9% | 1.8% | 3.5% | |
| EBITDA margin | 6% | 6% | 6% | 6% | |
| Implied EV / EBITDA | 11.3x | 11.0x | 10.8x | 10.4x |
Year-1 growth is against LTM at announcement ($83B revenue, $5.3B EBITDA); later years are year over year.
Express Scripts management prepared standalone forecasts for fiscal 2018-2022 (March 2018), showing Total Revenues of $101,728 million in 2018 declining to $93,940 million in 2022, Core Revenues of $82,953 million rising to $93,940 million, Adjusted EBITDA of $7,705 million in 2018 falling to $5,973 million in 2022 (Core EBITDA of $5,346 million rising to $5,973 million), Adjusted Net Income of $5,146 million to $3,897 million and Adjusted EPS of $9.37 to $9.01; extrapolations for 2023-2027 were provided to the advisors for the long-term DCF, and Express Scripts also provided projected synergies (management estimated approximately $1.5 billion). Cigna management prepared five-year standalone forecasts with operating revenues of $45.1 billion in 2018 growing to $63.4 billion in 2022, adjusted income from operations of $3.2 billion to $4.3 billion, adjusted income per share of $13.53 to $20.84, Morgan Stanley-calculated EBITDA of $5.3 billion to $7.6 billion and unlevered free cash flows of $2.1 billion to $2.9 billion. Cigna also prepared adjusted Express Scripts projections (2018-2022 adjusted income from operations of $4,904 million to $4,068 million; unlevered free cash flows of $5,567 million to $4,658 million) and Cigna projected synergies accruing to stockholders of $112 million in 2019 rising to $634 million in 2022.
Process notes
Other Managed Care fairness opinions
- WellCare Health Plans / Centene 2019 · 14.5x EV/EBITDA
- Dental Care Plus Group / DentaQuest 2019 · 10.4x 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
- Magellan Health / Centene 2021 · 15.6x EV/EBITDA
All Managed Care opinions → · Centerview Partners opinions · Lazard opinions