Health Net acquired by Centene: fairness opinion by J.P. Morgan and Allen
Deal terms
Each share of Health Net common stock converted into $28.25 in cash plus 0.6220 shares of Centene common stock; implied value of $78.57 per share based on Centene's July 1, 2015 closing price of $80.90. Followed by a subsequent merger of the surviving corporation into Merger Sub II intended to qualify as a Section 368(a) reorganization.
Implied value per share by method vs. $28.25 offer
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
Discounted cash flow assumptions
A parallel DCF of Centene (CY2016-2017 Centene Projections plus CY2018-2025 extrapolations, 2.0%-3.0% terminal growth, 8.0%-9.0% discount rates) indicated implied Centene equity value per share of $65.75-$92.00.
Selected public companies (8)
UnitedHealth Group Incorporated · Anthem, Inc. · Aetna Inc. · Cigna Corporation · Humana Inc. · Centene Corporation (CNC) · Molina Healthcare, Inc. · WellCare Health Plans, Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| FV / CY2015E EBITDA | 9.4x | 10.5x | 13.6x | 9.0x–10.0x | $61.25–$68.75 |
| FV / CY2016E EBITDA | 7.2x | 9.6x | 12.4x | 7.5x–9.0x | $58.00–$70.75 |
| P / CY2015E EPS | 15.7x | 19.7x | 28.9x | 16.0x–20.0x | $53.00–$66.25 |
| P / CY2016E EPS | 14.2x | 16.7x | 25.5x | 15.0x–17.0x | $60.75–$68.75 |
| FV / CY2015E EBITDA (Centene valuation) | 9.4x | 10.5x | 13.6x | 10.0x–13.8x | $57.25–$82.50 |
| FV / CY2016E EBITDA (Centene valuation) | 7.2x | 9.6x | 12.4x | 9.5x–12.5x | $67.25–$91.75 |
| P / CY2015E EPS (Centene valuation) | 15.7x | 19.7x | 28.9x | 26.0x–29.5x | $72.00–$81.75 |
| P / CY2016E EPS (Centene valuation) | 14.2x | 16.7x | 25.5x | 18.0x–25.5x | $58.50–$82.75 |
Selected precedent transactions (6)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2015-06 | Cigna Corporation | Anthem, Inc. | — |
| 2012-08 | Coventry Health Care, Inc. | Aetna Inc. | — |
| 2012-07 | Amerigroup Corporation | WellPoint, Inc. | — |
| 2011-10 | HealthSpring, Inc. | Cigna Corporation | — |
| 2007-11 | Great-West Healthcare | Cigna Corporation | — |
| 2007-03 | Sierra Health Services Inc. | UnitedHealth Group Incorporated | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| Transaction Value / LTM EBITDA | 5.3x | 8.0x | 17.0x | 7.5x–11.5x | $50.00–$80.25 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Historical Trading Range (Health Net, 52 weeks ended July 1, 2015) - for reference only | Health Net common stock traded between $40.84 and $65.33 over the 52-week period ending July 1, 2015, compared to the $65.06 closing price and $78.57 implied merger consideration. | $40.84–$65.33 |
| Analyst Price Targets (Health Net) - for reference only | Publicly available equity research analyst price targets for Health Net (excluding high and low estimates) ranged from $58.00 to $72.00 per share. | $58.00–$72.00 |
| Historical Trading Range (Centene, 52 weeks ended July 1, 2015) - for reference only | Centene common stock traded between $35.49 and $82.18 over the 52-week period ending July 1, 2015, compared to the $80.90 closing price. | $35.49–$82.18 |
| Analyst Price Targets (Centene) - for reference only | Publicly available equity research analyst price targets for Centene ranged from $73.00 to $89.00 per share. | $73.00–$89.00 |
| Relative Implied Exchange Ratio Analysis | Implied exchange ratios (after adjusting Health Net values for the $28.25 cash consideration): FV/EBITDA 2015E 0.4016x-0.7104x; FV/EBITDA 2016E 0.3242x-0.6334x; P/E 2015E 0.3021x-0.5265x; P/E 2016E 0.3924x-0.6945x; DCF 0.3573x-0.7955x. Compared to the market exchange ratio of 0.4550x on July 1, 2015 and the proposed 0.6220x exchange ratio. | — |
$1 million payable upon delivery of the opinion; approximately $20 million Base Fee payable on consummation (calculated based on Centene's closing share price on August 13, 2015; final fee based on closing price at consummation). Health Net may, at its sole discretion, pay an additional discretionary fee of $0 up to approximately 142% of the Base Fee. If the mergers are not consummated and Health Net receives a termination payment, J.P. Morgan receives the lesser of 10% of such payment (net of fees paid and expenses) and $10 million.
Opinion of Allen to the acquirer board
Discounted cash flow assumptions
Standalone unlevered after-tax free cash flows for the second half of FY2015 through FY2018; cash flows and terminal values discounted to present value as of June 30, 2015.
Selected public companies (8)
UnitedHealth Group Incorporated · Anthem, Inc. · Aetna Inc. · Cigna Corporation · Humana Inc. · Centene Corporation (CNC) · WellCare Health Plans, Inc. · Molina Healthcare, Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| Firm Value / CY2015E EBITDA | 9.2x | 10.5x | 14.1x | 9.0x–11.0x | $57.06–$71.31 |
| Firm Value / CY2016E EBITDA | 6.8x | 9.9x | 12.2x | 8.0x–10.0x | $62.31–$79.65 |
| P / CY2015E EPS | 16.5x | 21.0x | 29.1x | 18.0x–22.0x | $59.40–$72.60 |
| P / CY2016E EPS | 15.0x | 17.5x | 25.2x | 16.0x–20.0x | $63.20–$79.00 |
Selected precedent transactions (10)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2012-08-20 | Coventry Health Care, Inc. | Aetna Inc. | — |
| 2012-07-09 | AMERIGROUP Corporation | Wellpoint, Inc. | — |
| 2011-10-24 | HealthSpring Inc. | Cigna Corporation | — |
| 2007-03-12 | Sierra Health Services, Inc. | UnitedHealth Group Incorporated | — |
| 2005-09-27 | WellChoice, Inc. | WellPoint, Inc. | — |
| 2005-07-06 | PacifiCare Health Systems, Inc. | UnitedHealth Group Incorporated | — |
| 2004-04-26 | Oxford Health Plans, Inc. | UnitedHealth Group Incorporated | — |
| 2003-10-27 | WellPoint Health Networks Inc. | Anthem Inc. | — |
| 2003-10-27 | Mid-Atlantic Medical Services, Inc. | UnitedHealth Group Incorporated | — |
| 2003-06-03 | Cobalt Corporation | WellPoint Health Networks Inc. | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| Firm Value / LTM EBITDA | 6.1x | 12.1x | 16.3x | 10.0x–12.0x | $73.54–$89.66 |
| Firm Value / One-Year Forward EBITDA | 6.3x | 10.4x | 13.7x | 9.0x–11.0x | $74.31–$92.39 |
| P / LTM EPS | 12.7x | 17.2x | 31.6x | 22.0x–26.0x | $73.68–$87.08 |
| P / One-Year Forward EPS | 12.5x | 16.7x | 20.1x | 18.0x–22.0x | $72.58–$88.71 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Centene Selected Public Companies Analysis | Allen & Company also performed a selected public companies analysis of Centene using eight managed care companies (five diversified: UnitedHealth, Anthem, Aetna, Cigna, Humana; three government-focused: Centene peers WellCare and Molina). Results not detailed in the excerpt. | — |
| Contribution Analysis | Reviewed the relative contributions of Centene and Health Net to certain financial metrics of the pro forma combined company based on internal financial forecasts and estimates. | — |
| Pro Forma Financial Impact / Accretion-Dilution Analysis | Reviewed the potential pro forma financial impact of the merger on Centene's estimated earnings per share based on internal forecasts and estimates of Centene and Health Net and potential cost savings. | — |
Fee arrangements not disclosed in the provided excerpt; Allen & Company was engaged as a financial advisor to Centene and rendered its opinion to the Centene Board that the merger consideration payable by Centene was fair, from a financial point of view, to Centene.
Management projections
| Projection year | Year 1 | Year 2 | Year 3 | CAGR |
|---|---|---|---|---|
| Revenue | $17B | $18B | $20B | 6.3% |
| Revenue growth | 6.2% | 6.3% | 6.3% | |
| EBITDA | $722M | $840M | $929M | 13.4% |
| EBITDA growth | 12.3% | 16.3% | 10.6% | |
| EBITDA margin | 4% | 5% | 5% | |
| Implied EV / EBITDA | 8.3x | 7.1x | 6.4x |
Year-1 growth is against LTM at announcement ($16B revenue, $643M EBITDA); later years are year over year.
Health Net management prepared internal financial projections for Health Net (the "Health Net Projections," with detailed forecasts for CY2016-2018 and extrapolations approved by Health Net management through CY2025), and Centene management prepared the "Centene Projections" (CY2016-2017, with extrapolations through CY2025 prepared at the direction of Health Net management). J.P. Morgan used these in its DCF and trading multiples analyses, along with estimated cost savings and synergies provided by Health Net management. Allen & Company used internal forecasts and estimates of Health Net management as adjusted by Centene management, covering the second half of FY2015 through FY2018, plus Centene management forecasts and Centene-estimated cost savings. Specific revenue/EBITDA figures were not included in the provided excerpts.
Process notes
Other Managed Care fairness opinions
- Catamaran / United HealthGroup 2015 · 15.2x EV/EBITDA
- Apollo Medical Holdings / Network Medical Management 2016
- Universal American / WellCare Health Plans 2016 · 9.3x EV/EBITDA
- Aetna / CVS Health 2017 · 12.1x EV/EBITDA
- Express Scripts Holding / Cigna 2018 · 11.6x EV/EBITDA
- Coventry Health Care / Aetna 2012 · 8.9x EV/EBITDA
All Managed Care opinions → · J.P. Morgan opinions · Allen opinions