HealthSpring acquired by Cigna: fairness opinion by Goldman Sachs
Announced October 24, 2011 · One-step merger · All cash ·
DEFM14A filed December 9, 2011
Managed Care Health Plans
Enterprise value
$3.8B
equity $3.7B
EV / LTM EBITDA
7.0x
EBITDA $549M · 10% margin
EV / LTM revenue
0.71x
revenue $5.4B
DCF discount rate
10.0%–12.0%
Exit multiple
Deal terms
ConsiderationAll cash
Price per share$55.00
Premium37.0%
Premium basisclosing price of $40.16 on October 21, 2011, last trading day before announcement
StructureOne-step merger
Termination fee$115M
Reverse termination fee—
Go-shopNone
Outside date—
FilingDEFM14A · EDGAR index
Implied value per share by method vs. $55.00 offer
Selected companies — EV / 2011E EBITDA (Commercial managed care peers) $39.16 – $51.30
Selected companies — EV / 2011E EBITDA (Medicaid peers) $39.16 – $51.30
Selected companies — EV / 2011E EBITDA (Medicare - Humana only) $39.16 – $51.30
Selected companies — 2012E P/E/G ratio (Commercial managed care peers) $37.48 – $51.54
Selected companies — 2012E P/E/G ratio (Medicaid peers) $37.48 – $51.54
Selected companies — 2012E P/E/G ratio (Medicare - Humana only) $37.48 – $51.54
Precedent transactions — 1-Day Premium $46.18 – $52.21
Precedent transactions — EV / LTM EBITDA (12 months ended 6/30/2011, pro forma for Bravo Health) $49.71 – $72.11
Discounted cash flow $54.12 – $70.67
Illustrative Present Value of Future Stock Price Analysis $34.67 – $55.14
Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.
Opinion of Goldman Sachs to the target board
Delivered October 24, 2011 · Fee $22.0M ($22.0M contingent on closing)
Discounted cash flow assumptions
Discount rate10.0%–12.0%
BasisWACC derived using capital asset pricing model, including beta for HealthSpring
Terminal valueExit multiple
Perpetuity growth—
Exit multiple5.0x–6.5x 2016E EBITDA
Projection periodQ4 2011 - 2016E
Projections usedHealthSpring management core case projections (sensitivity using core + strategic case projections)
Implied value per share$54.12–$70.67
Discounted to present value as of September 30, 2011 using unlevered free cash flows. Sensitivity analysis using core + strategic case projections yielded $58.77 to $78.30 per share.
Selected public companies (12)
Aetna, Inc. · Cigna Corporation · WellPoint, Inc. · UnitedHealth Group Incorporated · Coventry Health Care, Inc. · Health Net, Inc. · Centene Corporation · AMERIGROUP Corporation · Molina Healthcare, Inc. · Wellcare Health Plans, Inc. · Humana Inc. · Universal American Corp.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / 2011E EBITDA (Commercial managed care peers) | 5.5x | — | 7.2x | 5.0x–6.5x | $39.16–$51.30 |
| EV / 2011E EBITDA (Medicaid peers) | 4.4x | — | 7.2x | 5.0x–6.5x | $39.16–$51.30 |
| EV / 2011E EBITDA (Medicare - Humana only) | 5.9x | — | 5.9x | 5.0x–6.5x | $39.16–$51.30 |
| 2012E P/E (Commercial managed care peers) | 7.8x | — | 10.1x | — | — |
| 2012E P/E (Medicaid peers) | 9.5x | — | 11.7x | — | — |
| 2012E P/E (Medicare - Humana only) | 9.8x | — | 9.8x | — | — |
| 2012E P/E/G ratio (Commercial managed care peers) | 0.7x | — | 0.9x | 0.8x–1.1x | $37.48–$51.54 |
| 2012E P/E/G ratio (Medicaid peers) | 0.8x | — | 0.9x | 0.8x–1.1x | $37.48–$51.54 |
| 2012E P/E/G ratio (Medicare - Humana only) | 1.1x | — | 1.1x | 0.8x–1.1x | $37.48–$51.54 |
Selected precedent transactions (31)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2009-07-20 | Health Net of the Northeast, Inc. | UnitedHealth Group Incorporated | — |
| 2007-11-02 | Fiserv, Inc. | UnitedHealth Group Incorporated | — |
| 2007-03-12 | Sierra Health Services, Inc. | UnitedHealth Group Incorporated | 10.9x EV/LTM EBITDA |
| 2005-07-06 | PacifiCare Health Systems, Inc. | UnitedHealth Group Incorporated | 13.1x EV/LTM EBITDA |
| 2004-04-26 | Oxford Health Plans, Inc. | UnitedHealth Group Incorporated | 7.5x EV/LTM EBITDA |
| 2003-10-27 | Mid Atlantic Medical Services, Inc. | UnitedHealth Group Incorporated | 12.9x EV/LTM EBITDA |
| 2002-06-02 | AmeriChoice Corp. | UnitedHealth Group Incorporated | 8.1x EV/LTM EBITDA |
| 2011-06-08 | CareMore Health Group, Inc. | WellPoint, Inc. (f/k/a Anthem, Inc.) | — |
| 2005-09-27 | WellChoice, Inc. | WellPoint, Inc. (f/k/a Anthem, Inc.) | 9.8x EV/LTM EBITDA |
| 2003-10-27 | WellPoint Health Networks, Inc. | WellPoint, Inc. (f/k/a Anthem, Inc.) | 9.2x EV/LTM EBITDA |
| 2002-04-29 | Trigon Healthcare, Inc. | WellPoint, Inc. (f/k/a Anthem, Inc.) | 15.6x EV/LTM EBITDA |
| 2003-06-02 | Cobalt Corporation | WellPoint, Inc. (f/k/a Anthem, Inc.) | 11.1x EV/LTM EBITDA |
| 2001-10-18 | RightCHOICE Managed Care, Inc. | WellPoint, Inc. (f/k/a Anthem, Inc.) | 10.9x EV/LTM EBITDA |
| 2007-11-26 | Great-West Healthcare | Cigna Corporation | — |
| 2004-09-15 | American Medical Security Group, Inc. | PacifiCare Health Systems, Inc. | 8.5x EV/LTM EBITDA |
| 2007-07-09 | Vista Healthplans | Coventry Health Care, Inc. | — |
| 2004-10-14 | First Health Group Corp. | Coventry Health Care, Inc. | 6.7x EV/LTM EBITDA |
| 2010-11-19 | Concentra Inc. | Humana Inc. | — |
| 2007-09-07 | KMG America Corporation | Humana Inc. | 15.3x EV/LTM EBITDA |
| 2007-06-19 | CompBenefits Corporation | Humana Inc. | 9.7x EV/LTM EBITDA |
| 2004-12-14 | CarePlus Health Plans, Inc. | Humana Inc. | — |
| 2010-08-26 | Bravo Health, Inc. | HealthSpring, Inc. | — |
| 2007-08-09 | Leon Medical Centers Health Plans, Inc. | HealthSpring, Inc. | 8.1x EV/LTM EBITDA |
| 2011-06-13 | Genworth Financial, Inc. | Aetna, Inc. | — |
| 2011-04-28 | Prodigy Health Group | Aetna, Inc. | — |
| 2007-05-24 | Schaller Anderson, Incorporated | Aetna, Inc. | — |
| 2005-06-24 | HMS Healthcare, Inc. | Aetna, Inc. | — |
| 2005-05-13 | ActiveHealth Management, Inc. | Aetna, Inc. | — |
| 2011-01-25 | American Health, Inc. | Triple-S Salud, Inc. | — |
| 2010-12-30 | CVS Caremark | Universal American Corp. | — |
| 2005-09-15 | UICI | The Blackstone Group and other private equity firms | 4.7x EV/LTM EBITDA |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| 1-Day Premium | 0.1x | 0.2x | 0.7x | 0.1x–0.3x | $46.18–$52.21 |
| EV / LTM EBITDA (12 months ended 6/30/2011, pro forma for Bravo Health) | 4.7x | — | 15.6x | 7.0x–10.0x | $49.71–$72.11 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Implied Premia and Multiples Analysis | $55.00 represented premia of 37.0% to the 10/21/2011 closing price of $40.16; 59.3% to the 9/21/2011 close of $34.52; 46.8% to the 30-day average of $37.46; 46.7% to the 60-day average of $37.49; 46.9% to the 90-day average of $37.43; 51.9% to the 1-year average of $36.21; and 13.7% to the 52-week high close of $48.36. Implied fully diluted equity value ~$3.741 billion and enterprise value ~$3.828 billion (net debt ~$87 million at 9/30/2011); EV/LTM EBITDA (12 months ended 6/30/2011, PF for Bravo, $507 million) of 7.6x; EV/2011E EBITDA of 7.0x; equity value/2011E net income of 12.9x; equity value/2012E net income of 12.3x; 2012E P/E/G of 1.2x. | — |
| Illustrative Present Value of Future Stock Price Analysis | Applied 1-year forward P/E multiples of 8.0x to 10.0x to estimated EPS for 2012-2016 from the core case projections (assuming $300 million debt repayment in 2012 and $250 million annual share repurchases 2013-2016), discounted at 11.5% cost of equity, yielding $34.67 to $55.14 per share. Sensitivity using core + strategic case projections yielded $36.57 to $63.53 per share. | $34.67–$55.14 |
Transaction fee of approximately $22 million, all contingent and payable upon consummation. Goldman received ~$8.7 million from HealthSpring and ~$575,000 from Cigna for investment banking services during the two years ended October 24, 2011.
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Management projections
| Projection year | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | CAGR |
|---|---|---|---|---|---|---|
| Revenue | $5.9B | $6.7B | $7.7B | $8.9B | $10B | 14.7% |
| Revenue growth | 8.8% | 13.6% | 15.5% | 15.0% | 14.6% | |
| EBITDA | $564M | $648M | $738M | $873M | $1.0B | 15.9% |
| EBITDA growth | 2.7% | 14.9% | 13.9% | 18.3% | 16.7% | |
| EBITDA margin | 10% | 10% | 10% | 10% | 10% | |
| Implied EV / EBITDA | 6.8x | 5.9x | 5.2x | 4.4x | 3.8x |
Year-1 growth is against LTM at announcement ($5.4B revenue, $549M EBITDA); later years are year over year.
Goldman Sachs used internal financial analyses and projections prepared by HealthSpring management and approved for its use, referred to as the "core case projections," covering the fourth quarter of 2011 through December 31, 2016. Goldman Sachs also used management's "core + strategic case projections," which reflect the estimated impact of certain strategic initiatives HealthSpring could undertake, for sensitivity analyses. Both cases reflected an industry tax in management's 2016 EBITDA estimate; average annual EPS growth from 2011 to 2016 was 10.6% under the core case and 14.5% under the core + strategic case.
Process notes
Competitive process: an unnamed "Company X" bid up to $56.00 per share in cash (above Cigna's $55.00), but the HealthSpring board chose Cigna due to greater deal certainty, particularly antitrust/regulatory risk; Goldman Sachs' opinion expressly noted it did not address the relative merits versus a third-party proposal at a higher price. Cigna's earlier proposals included a mixed cash/stock structure ($20.00 cash plus 0.67 Cigna share, ~$50.06) before converting to all cash. Termination fee negotiated down from $150 million to $115 million ($57.5 million in certain circumstances, with an additional $57.5 million potentially payable later). Merger agreement included a required vote provision and voting agreements from directors/executive officers (~4.7% of shares), plus retention agreements with four key executives. Single fairness opinion, delivered to the HealthSpring board by Goldman Sachs.
Other Managed Care fairness opinions
- Medco Health Solutions / Express Scripts Holding 2011 · 9.7x EV/EBITDA
- Coventry Health Care / Aetna 2012 · 8.9x EV/EBITDA
- AMERIGROUP / Wellpoint Healthcare Networks 2012 · 12.3x EV/EBITDA
- Catalyst Health Solutions / SXC Health Solutions 2012 · 19.1x EV/EBITDA
- Health Net / Centene 2015 · 9.3x EV/EBITDA
- Catamaran / United HealthGroup 2015 · 15.2x EV/EBITDA