Fairness opinions › Medical Devices and Supplies › 2016

HeartWare International acquired by Medtronic: fairness opinion by Perella Weinberg Partners

Announced June 27, 2016 · Tender offer · All cash · SC 14D9 filed July 26, 2016

Medical Devices and Supplies Medical Devices

Enterprise value

$1.1B

EV / LTM EBITDA

—

EBITDA $-32.0M · -13% margin

EV / LTM revenue

4.47x

revenue $240M

DCF discount rate

10.0%–11.0%

Perpetuity growth

Deal terms

ConsiderationAll cash

Price per share$58.00

Premium—

Premium basis—

StructureTender offer

Termination fee$27.5M (2.5% of equity)

Reverse termination fee—

Go-shopNone

Outside date—

FilingSC 14D9 · EDGAR index

Implied value per share by method vs. $58.00 offer

Selected companies — EV / 2016E Revenue (Street Case, ~$227mm) $29.75 – $48.25

Selected companies — EV / 2016E Revenue (Management Forecasts, ~$240mm) $31.50 – $51.00

Selected companies — EV / 2017E Revenue (Street Case, ~$249mm) $25.75 – $46.00

Selected companies — EV / 2017E Revenue (Management Forecasts, ~$250mm) $26.00 – $46.25

Selected companies — EV / 2018E Revenue (Management Forecasts, ~$374mm) $39.50 – $59.75

Precedent transactions — EV / LTM Revenue (HeartWare LTM revenue ~$262mm) $41.50 – $62.75

Precedent transactions — EV / NTM Revenue (HeartWare NTM revenue ~$230mm) $35.00 – $55.00

Discounted cash flow $28.50 – $78.00

Equity Research Analyst Price Targets $29.00 – $60.00

Historical Stock Trading $25.02 – $94.15

Precedent Premium Paid Analysis $40.25 – $51.00

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

Opinion of Perella Weinberg Partners to the target board

Delivered June 26, 2016 · Fee $16.0M ($16.0M contingent on closing), $1.0M on delivery of the opinion

Discounted cash flow assumptions

Discount rate10.0%–11.0%

BasisWACC derived using the capital asset pricing model (target capital structure, cost of long-term debt, forecasted tax rate, Bloomberg adjusted beta)

Terminal valuePerpetuity growth

Perpetuity growth2.0%–3.0%

Exit multiple—

Projection period2016E-2030E

Projections usedStreet Case (FactSet consensus) and Management Forecasts, plus three Management Forecast sensitivities

Implied value per share$28.50–$78.00

Present value as of June 24, 2016 of unlevered free cash flows for remainder of FY2016 through FY2030. Implied per share ranges: Street Case $28.50-$37.25; Management Forecast $55.50-$72.00; sensitivity with Pipeline Products (MVAD, CircuLite, Longhorn) valued at a 15% discount rate $49.50-$61.25; sensitivity with HVAD gaining 5% more LVAD market share $56.75-$78.00; HVAD franchise only (no Pipeline Product commercialization) $37.75-$49.50.

Selected public companies (9)

ABIOMED, Inc. · AtriCure, Inc. · Cardiovascular Systems, Inc. · Endologix, Inc. · NuVasive, Inc. · The Spectranetics Corporation · Tandem Diabetes Care, Inc. · Wright Medical Group, N.V. · ZELTIQ Aesthetics, Inc.

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
EV / 2016E Revenue (Street Case, ~$227mm)	1.8x	3.5x	10.7x	2.5x–4.0x	$29.75–$48.25
EV / 2016E Revenue (Management Forecasts, ~$240mm)	1.8x	3.5x	10.7x	2.5x–4.0x	$31.50–$51.00
EV / 2017E Revenue (Street Case, ~$249mm)	1.3x	3.0x	8.2x	2.0x–3.5x	$25.75–$46.00
EV / 2017E Revenue (Management Forecasts, ~$250mm)	1.3x	3.0x	8.2x	2.0x–3.5x	$26.00–$46.25
EV / 2018E Revenue (Management Forecasts, ~$374mm)	1.0x	2.7x	6.5x	2.0x–3.0x	$39.50–$59.75

Selected precedent transactions (22)

Date	Target	Acquirer	Multiple
2016-06	LDR Holding Corporation	Zimmer Biomet Holdings, Inc.	6.1x EV / LTM Revenue
2016-02	Sage Products, LLC	Stryker Corporation	5.3x EV / LTM Revenue
2015-07	Thoratec Corporation	St. Jude Medical, Inc.	7.2x EV / LTM Revenue
2013-12	Given Imaging Ltd.	Covidien plc	4.7x EV / LTM Revenue
2013-09	MAKO Surgical Corp.	Stryker Corporation	14.1x EV / LTM Revenue
2013-04	Conceptus, Inc.	Bayer AG	7.6x EV / LTM Revenue
2012-11	HealthPoint Biotherapeutics	Smith & Nephew plc	5.3x EV / LTM Revenue
2012-03	ZOLL Medical Corporation	Asahi Kasei Corporation	3.9x EV / LTM Revenue
2011-12	SonoSite, Inc.	FUJIFILM Holdings Corporation	3.5x EV / LTM Revenue
2010-10	AGA Medical Holdings, Inc.	St. Jude Medical, Inc.	6.3x EV / LTM Revenue
2010-06	ev3 Inc.	Covidien plc	5.5x EV / LTM Revenue
2016-02	Physio-Control International, Inc.	Stryker Corporation	2.5x EV / LTM Revenue
2014-12	Volcano Corporation	Royal Philips N.V.	3.2x EV / LTM Revenue
2014-10	Tornier N.V.	Wright Medical Group, Inc.	4.8x EV / LTM Revenue
2014-09	Nobel Biocare Holding AG	Danaher Corporation	3.0x EV / LTM Revenue
2014-02	ArthroCare Corporation	Smith & Nephew plc	3.7x EV / LTM Revenue
2012-12	Gambro AB	Baxter International Inc.	2.5x EV / LTM Revenue
2011-10	Atrium Medical Corporation	Getinge AB	3.4x EV / LTM Revenue
2011-07	Kinetic Concepts, Inc.	Apax Partners	3.0x EV / LTM Revenue
2011-05	Orthovita, Inc.	Stryker Corporation	3.3x EV / LTM Revenue
2011-04	American Medical Systems Holdings, Inc.	Endo Pharmaceuticals Holdings, Inc.	5.2x EV / LTM Revenue
2010-10	Neurovascular business of Boston Scientific Corporation	Stryker Corporation	4.3x EV / LTM Revenue

Multiple	Low	Median	High	Range applied	Implied per share
EV / LTM Revenue (HeartWare LTM revenue ~$262mm)	2.5x	4.5x	14.1x	3.0x–4.5x	$41.50–$62.75
EV / NTM Revenue (HeartWare NTM revenue ~$230mm)	2.9x	4.2x	11.2x	2.9x–4.5x	$35.00–$55.00
EV / LTM Revenue - high growth (>10% NTM) subgroup median	—	5.5x	—	—	—
EV / NTM Revenue - high growth (>10% NTM) subgroup median	—	5.1x	—	—	—
EV / LTM Revenue - low growth (<10% NTM) subgroup median	—	3.3x	—	—	—
EV / NTM Revenue - low growth (<10% NTM) subgroup median	—	3.2x	—	—	—

Other analyses

Analysis	Summary	Implied per share
Equity Research Analyst Price Targets	Reviewed publicly available one-year analyst price targets published May 4, 2016 through May 22, 2016; range $29.00-$60.00 with a median of $38.00, vs. $58.00 per share consideration.	$29.00–$60.00
Historical Stock Trading	52-week period ending June 24, 2016 trading range $25.02-$94.15; October 1, 2015 to June 24, 2016 trading range $25.02-$57.85. Not considered part of the financial analysis supporting the opinion; noted for reference.	$25.02–$94.15
Precedent Premium Paid Analysis	Reviewed premiums paid in acquisitions of public companies of $200mm-$2bn from June 24, 2011 to June 24, 2016 (FactSet/Dealogic), with a healthcare subgroup. Healthcare 1-day premiums: 24% (25th), 38% (median), 60% (75th); 1-week 24%/42%/61%; 1-month 30%/44%/65%. All industries 1-day 16%/28%/43%; 1-week 17%/29%/46%; 1-month 20%/32%/50%. Applied a 30%-65% premium range to the 30-day VWAP of $30.88 as of June 24, 2016, implying $40.25-$51.00 per share. Not considered part of the financial analysis supporting the opinion.	$40.25–$51.00

$1 million payable upon delivery of the opinion, credited against an additional transaction fee currently estimated at approximately $16 million payable upon closing. If the Merger is not consummated during the engagement term or the twelve months thereafter, HeartWare will pay 25% of any break-up/termination fee received, capped at the expected transaction fee. Perella Weinberg received approximately $36 million in compensation from Medtronic and affiliates in the prior two years, including advising Medtronic on its acquisition of Covidien plc.

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Management projections

Projection year	Year 1	Year 2	Year 3	Year 4	Year 5	CAGR
Revenue	$250M	$374M	$421M	$480M	$514M	19.7%
Revenue growth	4.2%	49.6%	12.6%	14.0%	7.1%
EBITDA	$-30.0M	$35.0M	$54.0M	$78.0M	$90.0M	—
EBITDA growth	—	—	54.3%	44.4%	15.4%
EBITDA margin	-12%	9%	13%	16%	18%
Implied EV / EBITDA	—	30.6x	19.9x	13.7x	11.9x

Year-1 growth is against LTM at announcement ($240M revenue, $-32.0M EBITDA); later years are year over year.

HeartWare management prepared forward-looking financial information for fiscal years 2016 through 2025 (updated in minor respects in May 2016) — the "Management Forecasts" — which were used by Perella Weinberg and shared with Medtronic. Total revenue was projected to go from $240 million in 2016 to $935 million in 2025, with EBITDA from $(32) million in 2016 to $193 million in 2025 (EBITDA turns positive at $35 million in 2018); net loss of $(55) million in 2016 rising to net income of $104 million in 2025. Perella Weinberg also used a Street Case based on FactSet consensus estimates, extended cash flows through fiscal 2030, and ran three sensitivities to the Management Forecasts (Pipeline Products discounted at 15%, HVAD gaining 5% more market share, and HVAD franchise only).

Process notes

Cash tender offer by Medtronic for $58.00 per share. Single financial advisor (Perella Weinberg Partners) delivered an oral opinion on June 26, 2016, confirmed in writing the same date, to the HeartWare board. Notably, Perella Weinberg had also received approximately $36 million from Medtronic (Parent) and its affiliates in the prior two years, including advising Medtronic on the Covidien acquisition. Two HeartWare directors (Chadwick Cornell and Stephen Oesterle, M.D.) were former Medtronic employees who continue to hold Medtronic equity. Termination fee of $27.5 million (approximately 2.5% of transaction value); the board viewed it as at the lower end of the range for transactions of this size. Historical stock trading and precedent premium paid analyses were expressly noted as not part of the analysis supporting the opinion.

Other Medical Devices and Supplies fairness opinions

Vascular Solutions / Teleflex 2016 · 25.7x EV/EBITDA
EndoChoice Holdings / Boston Scientific 2016
Hansen Medical / Auris Surgical Robotics 2016
LDR Holding / Zimmer Biomet Holdings 2016
Symmetry Surgical / Roundtable Healthcare Partners 2016 · 12.6x EV/EBITDA
Newport / MKS Instruments 2016 · 8.2x EV/EBITDA

All Medical Devices and Supplies opinions → · Perella Weinberg Partners opinions