Fairness opinions › Hospitals › 2013

Health Management Associates acquired by Community Health Systems: fairness opinion by Morgan Stanley and Lazard and UBS

Announced July 30, 2013 · One-step merger · Cash and stock · DEFM14A filed November 22, 2013

Hospitals Hospital: General Acute Care

Enterprise value

$7.3B

EV / LTM EBITDA

9.1x

EBITDA $800M · 14% margin

EV / LTM revenue

1.24x

revenue $5.9B

DCF discount rate

7.0%–8.0%

Exit multiple

Deal terms

ConsiderationCash and stock

Price per share$10.50

Premium7.3%

Premium basisHMA closing price of $12.48 on November 8, 2013 vs. $13.39 implied merger consideration (UBS historical trading analysis)

StructureOne-step merger

Termination fee$109M (2.9% of equity)

Reverse termination fee—

Go-shopNone

Outside date—

FilingDEFM14A · EDGAR index

CVR: One CVR per share entitling the holder to a cash payment of up to $1.00 (originally proposed at $1.50, reduced by $0.50) following and conditioned upon final resolution of certain existing regulatory and legal matters involving HMA, subject to reduction of $0.90 for each dollar of losses in excess of a deductible

$10.50 in cash plus 0.06942 of a share of CHS common stock plus one CVR per HMA share; implied merger consideration of $13.78 based on CHS closing price of $47.23 on July 29, 2013 (and $13.39 based on CHS closing price on November 8, 2013), in each case excluding the CVR

Implied value per share by method vs. $10.50 offer

Selected companies — AV / CY2013E EBITDA (Street Case) (Morgan Stanley) $9.50 – $13.00

Selected companies — AV / CY2013E EBITDA (June/July Base Case) (Morgan Stanley) $9.00 – $12.50

Selected companies — AV / CY2014E EBITDA (Street Case) (Morgan Stanley) $9.75 – $13.50

Selected companies — AV / CY2014E EBITDA (June/July Base Case) (Morgan Stanley) $10.75 – $14.75

Selected companies — P / CY2013E EPS (Street Case) (Morgan Stanley) $10.25 – $14.50

Selected companies — P / CY2013E EPS (June/July Base Case) (Morgan Stanley) $9.50 – $13.75

Selected companies — P / CY2014E EPS (Street Case) (Morgan Stanley) $10.25 – $15.25

Selected companies — P / CY2014E EPS (June/July Base Case) (Morgan Stanley) $10.50 – $15.75

Precedent transactions — AV / LTM EBITDA (12 months ended 6/30/2013) (Morgan Stanley) $9.50 – $16.25

Precedent transactions — AV / LTM EBITDA at Tenet/Vanguard multiple (7.9x) (Morgan Stanley) $12.50

Discounted cash flow (Morgan Stanley) $9.00 – $15.75

Trading Range (52-week, period ending July 26, 2013 disregarding closing prices after May 24, 2013) (Morgan Stanley) $6.27 – $13.63

Research Analyst Price Targets (Morgan Stanley) $8.75 – $15.00

Leveraged Buyout Analysis (Morgan Stanley) $7.25 – $13.25

Selected companies — EV / CY2013E EBITDA (Lazard) $4.50 – $7.50

Selected companies — EV / CY2014E EBITDA (Lazard) $2.00 – $4.50

Precedent transactions — EV / 3QA+1QE EBITDA applied to CY2013E EBITDA (October Base Case) (Lazard) $8.50 – $15.00

Precedent transactions — EV / Next 4QE EBITDA applied to CY2014E EBITDA (October Base Case) (Lazard) $6.50 – $8.50

Discounted cash flow (Lazard) $2.00 – $9.50

HMA Analyst Price Targets Analysis (Lazard) $12.00 – $15.00

HMA Historical Trading Analysis (Lazard) $5.99 – $13.24

CHS Selected Comparable Companies Analysis (Lazard) $38.00 – $68.50

CHS Analyst Price Targets Analysis (Lazard) $41.00 – $64.00

CHS Historical Trading Analysis (Lazard) $23.73 – $51.18

Discounted cash flow (UBS) $4.35 – $8.13

Historical Trading Analysis for HMA (UBS) $7.37 – $16.94

Historical Trading Analysis for CHS (UBS) $27.83 – $51.18

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

Opinion of Morgan Stanley to the target board

Delivered July 29, 2013 · Fee $34.4M ($31.4M contingent on closing), $3.0M on delivery of the opinion

Discounted cash flow assumptions

Discount rate7.0%–8.0%

BasisWACC calculation and HMA's assumed cost of equity using CAPM

Terminal valueExit multiple

Perpetuity growth—

Exit multiple6.5x–7.5x NTM EBITDA

Projection period2013E-2018E

Projections usedJune/July Base Case and June/July Upside Case (HMA management)

Implied value per share$9.00–$15.75

June/July Base Case: $9.00-$13.25 per share; June/July Upside Case: $11.00-$15.75 per share. Discounted to present value as of June 30, 2013; stock-based compensation treated as a cash expense.

Selected public companies (6)

Community Health Systems, Inc. (CYH) · HCA Holdings, Inc. (HCA) · LifePoint Hospitals, Inc. (LPNT) · Tenet Healthcare Corporation (THC) · Universal Health Services, Inc. (UHS) · Vanguard Health Systems, Inc. (VHS)

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
AV / CY2013E EBITDA (Street Case)	6.2x	—	8.3x	6.5x–7.5x	$9.50–$13.00
AV / CY2013E EBITDA (June/July Base Case)	6.2x	—	8.3x	6.5x–7.5x	$9.00–$12.50
AV / CY2014E EBITDA (Street Case)	5.6x	—	7.6x	6.0x–7.0x	$9.75–$13.50
AV / CY2014E EBITDA (June/July Base Case)	5.6x	—	7.6x	6.0x–7.0x	$10.75–$14.75
P / CY2013E EPS (Street Case)	12.6x	—	17.3x	12.0x–17.0x	$10.25–$14.50
P / CY2013E EPS (June/July Base Case)	12.6x	—	17.3x	12.0x–17.0x	$9.50–$13.75
P / CY2014E EPS (Street Case)	10.4x	—	14.7x	10.0x–15.0x	$10.25–$15.25
P / CY2014E EPS (June/July Base Case)	10.4x	—	14.7x	10.0x–15.0x	$10.50–$15.75

Selected precedent transactions (6)

Date	Target	Acquirer	Multiple
2013-06-24	Vanguard Health Systems, Inc.	Tenet Healthcare Corporation	7.9x AV / LTM EBITDA
2007-03-19	Triad Hospitals Inc.	Community Health Systems, Inc.	9.8x AV / LTM EBITDA
2006-07-24	HCA Holdings, Inc.	Bain Capital Partners LLC, Kohlberg Kravis Roberts & Co. L.P., and Merrill Lynch Global Private Equity	7.8x AV / LTM EBITDA
2004-07-23	Vanguard Health Systems, Inc.	The Blackstone Group	10.2x AV / LTM EBITDA
2004-05-05	IASIS Healthcare Corporation	Texas Pacific Group	8.6x AV / LTM EBITDA
2000-10-19	Quorum Health Group, Inc.	Triad Hospitals Inc.	7.9x AV / LTM EBITDA

Multiple	Low	Median	High	Range applied	Implied per share
AV / LTM EBITDA (12 months ended 6/30/2013)	7.8x	—	10.2x	7.0x–9.0x	$9.50–$16.25
AV / LTM EBITDA at Tenet/Vanguard multiple (7.9x)	7.9x	—	7.9x	7.9x	$12.50

Other analyses

Analysis	Summary	Implied per share
Trading Range (52-week, period ending July 26, 2013 disregarding closing prices after May 24, 2013)	Low and high closing prices for HMA common stock were $6.27 and $13.63; closing price on May 24, 2013 was $11.04	$6.27–$13.63
Research Analyst Price Targets	Twenty analysts published price targets since May 3, 2013 ranging $10.00-$17.00 with a median of $14.00; discounted one year at 13% to present value as of July 26, 2013 yielding $8.75-$15.00	$8.75–$15.00
Leveraged Buyout Analysis	Assumed 12/31/2013 transaction date, 5-year hold to 12/31/2018, 6.0x total debt/LTM EBITDA, minimum 22.5% sponsor equity contribution, exit multiple 6.5x-7.5x NTM EBITDA and target IRR of 20%-25%; June/July Base Case (adjusted to remove future acquisitions) $7.25-$11.50, June/July Upside Case $9.25-$13.25	$7.25–$13.25

$3 million received upon announcement of the merger; approximately $31.366 million payable upon consummation. If HMA receives compensation from CHS upon termination of the merger agreement, Morgan Stanley is entitled to 10% of such compensation (less the $3 million announcement fee), capped at approximately $34.366 million in total. Morgan Stanley received approximately $2.829 million from HMA and $5.735 million from CHS for financing services in the prior two years.

Opinion of Lazard to the target board

Delivered November 12, 2013 · Fee $2.5M, $2.0M on delivery of the opinion

Discounted cash flow assumptions

Discount rate7.0%–8.0%

BasisLazard's judgment of estimated range of WACC based on analysis of selected comparable companies

Terminal valuePerpetuity growth

Perpetuity growth3.3%–3.8%

Exit multiple—

Projection periodQ4 2013E-2018E

Projections usedOctober Base Case (HMA management); at HMA's direction the October Upside Case was not used

Implied value per share$2.00–$9.50

Discounted to present value as of September 30, 2013; stock-based compensation treated as a cash expense. Compared to per share merger consideration of $13.39.

Selected public companies (6)

Community Health Systems, Inc. (standalone) — core comparable (CYH) · Community Health Systems, Inc. (pro forma for the merger) (CYH) · HCA Holdings Inc. (HCA) · Universal Health Services, Inc. (UHS) · LifePoint Hospitals, Inc. — core comparable (LPNT) · Tenet Healthcare Corporation (THC)

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
EV / CY2013E EBITDA	7.2x	7.7x	9.3x	6.5x–7.5x	$4.50–$7.50
EV / CY2014E EBITDA	6.6x	7.3x	8.6x	6.0x–7.0x	$2.00–$4.50

Selected precedent transactions (3)

Date	Target	Acquirer	Multiple
2013-06-24	Vanguard Health Systems, Inc.	Tenet Healthcare Corporation	7.7x EV / 3QA+1QE EBITDA
2007-03-19	Triad Hospitals Inc.	Community Health Systems, Inc.	9.9x EV / 3QA+1QE EBITDA
2006-07-24	HCA Holdings, Inc.	Bain Capital Partners LLC, Kohlberg Kravis Roberts and Co. L.P., and Merrill Lynch Global Private Equity	7.9x EV / 3QA+1QE EBITDA

Multiple	Low	Median	High	Range applied	Implied per share
EV / 3QA+1QE EBITDA applied to CY2013E EBITDA (October Base Case)	7.7x	—	9.9x	7.7x–9.9x	$8.50–$15.00
EV / Next 4QE EBITDA applied to CY2014E EBITDA (October Base Case)	7.6x	—	8.4x	7.6x–8.4x	$6.50–$8.50

Other analyses

Analysis	Summary	Implied per share
HMA Analyst Price Targets Analysis	Wall Street analyst price targets for HMA as of November 8, 2013 ranged $12.00-$15.00; as of May 6, 2013 ranged $10.00-$14.00 (informational only)	$12.00–$15.00
HMA Historical Trading Analysis	52-week closing prices through May 6, 2013 ranged from a low of $5.99 to a high of $13.24 (informational only)	$5.99–$13.24
CHS Selected Comparable Companies Analysis	Applied EV/EBITDA multiples of 7.0x-8.0x to CHS 2013E EBITDA and 6.5x-7.5x to 2014E EBITDA (CHS management), implying CHS standalone equity value of $38.00-$57.50 (2013) and $46.00-$68.50 (2014), vs. CHS share price of $41.58 (11/8/13) and $47.23 (7/29/13)	$38.00–$68.50
CHS Analyst Price Targets Analysis	CHS analyst price targets as of November 8, 2013 ranged $41.00-$64.00; as of July 29, 2013 ranged $38.00-$67.00	$41.00–$64.00
CHS Historical Trading Analysis	52-week closing prices of CHS through July 29, 2013 ranged from $23.73 to $51.18	$23.73–$51.18

$500,000 payable upon execution of the September 24, 2013 engagement letter and $2,000,000 payable upon the earliest of the mailing of the definitive proxy statement, expiration of the engagement, or termination of the engagement. No portion contingent on consummation.

Opinion of UBS to the target board

Delivered November 12, 2013 · Fee $2.5M, $2.0M on delivery of the opinion

Discounted cash flow assumptions

Discount rate6.5%–8.0%

BasisHMA's estimated weighted average cost of capital using the capital asset pricing model

Terminal valueExit multiple

Perpetuity growth—

Exit multiple7.0x–8.0x CY2018E LTM EBITDA

Projection periodQ4 2013E-2018E

Projections usedOctober Base Case (HMA management)

Implied value per share$4.35–$8.13

Present values calculated as of September 30, 2013; compared to the $13.39 implied per share value of the merger consideration.

Selected public companies (5)

HCA Holdings (HCA) · Tenet Healthcare Corporation (THC) · Universal Health Services (UHS) · Community Health Systems (CYH) · LifePoint Hospitals (LPNT)

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
EV / CY2013E EBITDA	7.4x	7.8x	9.2x	—	—
EV / CY2014E EBITDA	6.7x	7.3x	8.6x	—	—
Price / CY2013E EPS	13.7x	15.8x	17.6x	—	—
Price / CY2014E EPS	10.6x	14.4x	15.4x	—	—

Selected precedent transactions (6)

Date	Target	Acquirer	Multiple
2013-06-24	Vanguard Health Systems Inc.	Tenet Healthcare	7.7x TV / LTM EBITDA
2007-03-19	Triad Hospitals	Community Health Systems	9.8x TV / LTM EBITDA
2006-07-24	HCA	Bain Capital, KKR, Merrill Lynch	7.8x TV / LTM EBITDA
2004-08-16	Province Healthcare	LifePoint Hospitals	12.2x TV / LTM EBITDA
2004-07-23	Vanguard Health Systems Inc.	Blackstone	10.2x TV / LTM EBITDA
2004-05-05	Iasis Healthcare	Texas Pacific Group	8.0x TV / LTM EBITDA

Multiple	Low	Median	High	Range applied	Implied per share
Transaction Value / LTM EBITDA	7.7x	8.9x	12.2x	—	—
Transaction Value / 3QA+1QE EBITDA	7.7x	8.6x	11.9x	—	—
Transaction Value / NTM EBITDA	7.6x	8.2x	10.0x	—	—

Other analyses

Analysis	Summary	Implied per share
Pro Forma Accretion/Dilution Analysis	Reviewed pro forma effect on CHS CY2014E and CY2015E EPS assuming midpoint of announced synergies of $165 million (40% realized in 2014, 80% in 2015) and a 33% tax rate; merger could be as much as 29.7% dilutive to CHS 2014E EPS and 19.9% dilutive to 2015E EPS	—
Historical Trading Analysis for HMA	For the one year period ended November 8, 2013: 3-month average $12.87 (4.0% premium), 6-month average $13.51 (0.9% discount), 52-week high $16.94 (21.0% discount), 52-week low $7.37 (81.6% premium), and closing price of $12.48 on November 8, 2013 (7.3% premium) vs. $13.39 merger consideration	$7.37–$16.94
Historical Trading Analysis for CHS	For the one year period ended November 8, 2013: CHS 3-month average $41.71, 6-month average $44.00, 52-week high $51.18, 52-week low $27.83, vs. closing price of $41.58 on November 8, 2013	$27.83–$51.18
CHS Selected Public Companies Analysis	Compared CHS to the same acute care hospital peers; CHS consensus EV/EBITDA of 7.4x (2013E) and 6.7x (2014E) and P/E of 14.3x (2013E) and 10.6x (2014E), vs. peer mean of 8.2x/7.6x EBITDA and 16.2x/14.2x EPS	—

Aggregate fee of $2,500,000: $500,000 payable upon retention and $2,000,000 payable in connection with UBS' completion of work relating to its opinion. UBS previously provided investment banking services to Glenview in connection with the consent solicitation that replaced the HMA board in August 2013; UBS or an affiliate may participate in financing for CHS.

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Management projections

Projection year	Year 1	Year 2	Year 3	Year 4	Year 5	CAGR
Revenue	$6.0B	$6.3B	$6.5B	$6.8B	$7.1B	4.4%
Revenue growth	2.0%	4.5%	4.4%	4.3%	4.3%
EBITDA	$743M	$772M	$791M	$840M	$902M	5.0%
EBITDA growth	-7.1%	3.9%	2.5%	6.2%	7.4%
EBITDA margin	12%	12%	12%	12%	13%
Implied EV / EBITDA	9.8x	9.4x	9.2x	8.7x	8.1x

Year-1 growth is against LTM at announcement ($5.9B revenue, $800M EBITDA); later years are year over year.

Morgan Stanley used HMA management's "June/July Base Case" and "June/July Upside Case" covering calendar years 2013 through 2018, plus publicly available research estimates ("Street Case"). Lazard and UBS, retained after signing, used HMA management's "October Base Case" (Q4 2013 through fiscal 2018); Lazard was directed by HMA not to use the "October Upside Case." The October forecasts were materially lower than the June/July forecasts, producing substantially lower standalone values (Lazard DCF $2.00-$9.50; UBS DCF $4.35-$8.13). CHS management also provided limited forecasts for CHS and announced synergy estimates with a midpoint of $165 million.

Process notes

Three fairness opinions were delivered to the HMA board: Morgan Stanley on July 29, 2013 (at signing, based on the June/July forecasts and a $13.78 implied value), and Lazard and UBS both on November 12, 2013 (based on the lower October Base Case and a $13.39 implied value). Lazard and UBS were retained after the merger agreement was executed and did not participate in negotiations; UBS had previously advised Glenview Capital in its consent solicitation that replaced the entire HMA board in August 2013. Morgan Stanley expressly did not take the CVR consideration into account, and neither Lazard nor UBS valued the CVR. The deal required a 70% stockholder approval threshold; HMA also owed CHS a $40 million fixed expense reimbursement if stockholders failed to adopt the merger agreement. The $109 million termination fee equals approximately 2.9% of HMA's implied equity value (excluding CVR value). Consideration had been negotiated down from an earlier $14.50 per share proposal after weak Q2 2013 results and additional OIG/SEC subpoenas.

Other Hospitals fairness opinions

Vanguard Health Systems / Tenet Healthcare 2013 · 8.1x EV/EBITDA
Kindred Healthcare / Humana/TPG/WCAS 2017 · 8.0x EV/EBITDA
LifePoint Health / Apollo Global Management 2018 · 7.5x EV/EBITDA
Select Medical / WCAS, et. al. 2026 · 8.0x EV/EBITDA

All Hospitals opinions → · Morgan Stanley opinions · Lazard opinions · UBS opinions