Fairness opinions › Digital / HealthTech › 2020

HMS acquired by Gainwell Technologies: fairness opinion by Barclays

Announced December 21, 2020 · One-step merger · All cash · DEFM14A filed February 22, 2021

Digital / HealthTech Payer Solutions Sponsor: Veritas Capital (The Veritas Capital Fund VII, L.P.)

Enterprise value

$3.4B

EV / LTM EBITDA

18.4x

EBITDA $185M · 27% margin

EV / LTM revenue

5.01x

revenue $678M

DCF discount rate

9.0%–10.0%

Perpetuity growth

Deal terms

ConsiderationAll cash

Price per share$37.00

Premium—

Premium basis—

StructureOne-step merger

Termination fee$67.4M (2.0% of equity)

Reverse termination fee$185M

Go-shopNone

Outside date—

FilingDEFM14A · EDGAR index

Implied value per share by method vs. $37.00 offer

Selected companies — EV / 2021E Adj. EBITDA $26.79 – $33.77

Selected companies — P / 2021E EPS $28.36 – $33.76

Precedent transactions — EV / 2020E Adj. EBITDA $29.01 – $35.98

Discounted cash flow $23.80 – $31.79

Equity Research Target Prices Analysis $31.00 – $40.00

Historical Share Price Analysis $18.20 – $33.98

Leveraged Acquisition Analysis $27.18 – $31.93

Illustrative Present Value of Future Stock Price Analysis $27.47 – $36.57

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

Opinion of Barclays to the target board

Delivered December 20, 2020 · Fee $32.9M ($32.9M contingent on closing), $3.0M on delivery of the opinion

Discounted cash flow assumptions

Discount rate9.0%–10.0%

BasisWACC of HMS and comparable companies derived via Capital Asset Pricing Model

Terminal valuePerpetuity growth

Perpetuity growth4.0%–4.5%

Exit multiple—

Projection periodQ4 2020 (Oct 1 - Dec 31, 2020) and 2021E-2024E

Projections usedHMS management projections (Company Forecasts)

Implied value per share$23.80–$31.79

Mid-year convention; unlevered free cash flows arithmetically derived from management forecasts; net debt as of September 30, 2020 subtracted from enterprise value; terminal value normalized by setting D&A equal to capex.

Selected public companies (8)

Cerner Corporation · R1 RCM Inc. · MultiPlan Corporation · Change Healthcare Inc. · Inovalon Holdings, Inc. · Allscripts Healthcare Solutions, Inc. · NextGen Healthcare, Inc. · HealthStream, Inc.

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
EV / 2021E Adj. EBITDA	7.9x	13.3x	22.5x	11.5x–14.5x	$26.79–$33.77
P / 2021E EPS	11.9x	22.2x	41.1x	21.0x–25.0x	$28.36–$33.76

Selected precedent transactions (10)

Date	Target	Acquirer	Multiple
2020-07-12	MultiPlan, Inc.	Churchill Capital Corp III	14.7x EV / LTM Adj. EBITDA
2018-06-19	Cotiviti Holdings, Inc.	Verscend Technologies, Inc.	17.9x EV / LTM Adj. EBITDA
2018-03-07	ABILITY Network	Inovalon Holdings, Inc.	16.6x EV / LTM Adj. EBITDA
2017-10-10	eviCore healthcare	Express Scripts Holding Company	13.6x EV / LTM Adj. EBITDA
2017-08-29	The Advisory Board Company	UnitedHealth Group Incorporated	12.0x EV / LTM Adj. EBITDA
2017-01-05	CEB Inc.	Gartner, Inc.	13.5x EV / LTM Adj. EBITDA
2016-08-09	Press Ganey Holdings, Inc.	EQT Partners Inc.	16.8x EV / LTM Adj. EBITDA
2016-04-27	ExamWorks Group, Inc.	Leonard Green & Partners, L.P.	14.3x EV / LTM Adj. EBITDA
2016-04-25	Verisk Analytics, Inc. (Healthcare Business)	Veritas Capital Fund Management, L.L.C.	10.0x EV / LTM Adj. EBITDA
2016-02-18	Truven Holding Corp.	International Business Machines Corporation	17.3x EV / LTM Adj. EBITDA

Multiple	Low	Median	High	Range applied	Implied per share
EV / 2020E Adj. EBITDA	10.0x	—	17.9x	14.5x–18.0x	$29.01–$35.98

Other analyses

Analysis	Summary	Implied per share
Equity Research Target Prices Analysis	One-year forward price targets from 12 equity research firms covering HMS as of December 18, 2020, ranging $31.00 to $40.00 with an average of $35.10.	$31.00–$40.00
Historical Share Price Analysis	52 weeks prior to December 18, 2020 trading range was $18.20 to $33.98; 30-day and 90-day VWAPs were $31.63 and $28.70. 52 weeks prior to October 2, 2020 (last trading day before strategic-options news) trading range was $18.20 to $34.96.	$18.20–$33.98
Leveraged Acquisition Analysis	LBO analysis assuming 7.0x total debt/EBITDA pro forma leverage, a 17.5% IRR on equity over five years, and terminal EBITDA multiples of 11.5x-14.5x, using management projections.	$27.18–$31.93
Illustrative Present Value of Future Stock Price Analysis	Applied EV/NTM EBITDA multiples of 11.5x-14.5x to NTM EBITDA at fiscal year ends 2021, 2022 and 2023 per management projections, subtracted projected net debt, and discounted to present value at a 10.5% cost of equity.	$27.47–$36.57

HMS paid Barclays $3.0 million upon delivery of its opinion, not contingent on the conclusion of the opinion or consummation of the Merger. Total compensation of $32.9 million payable on completion of the Merger, against which the opinion fee is credited. Expense reimbursement and indemnification also provided.

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Management projections

Projection year	Year 1	Year 2	Year 3	Year 4	CAGR
Revenue	$768M	$837M	$935M	$1.0B	9.9%
Revenue growth	13.3%	9.0%	11.7%	9.1%
EBITDA	$215M	$240M	$276M	$309M	12.9%
EBITDA growth	16.2%	11.6%	15.0%	12.0%
EBITDA margin	28%	29%	30%	30%
Implied EV / EBITDA	15.8x	14.2x	12.3x	11.0x

Year-1 growth is against LTM at announcement ($678M revenue, $185M EBITDA); later years are year over year.

HMS senior management prepared the "Company Forecasts" covering 2020F through 2024E, which were provided to the Board, Barclays, Gainwell and other process participants. Total revenue grows from $678 million in 2020F to $1,020 million in 2024E, with Adjusted EBITDA rising from $185 million in 2020F to $309 million in 2024E. Unlevered free cash flow (arithmetically derived, not prepared by management) was $37 million for Q4 2020F, $25 million in 2021E, $117 million in 2022E, $58 million in 2023E and $155 million in 2024E.

Process notes

Single financial advisor (Barclays) to the HMS Board; an M&A Committee of the Board oversaw negotiations. Barclays disclosed ~$32.1 million of fees received from Veritas Capital and its affiliates/portfolio companies from January 1, 2017 through December 20, 2020, but no fees from HMS or Gainwell during that period. Termination fee described as approximately 2.0% of transaction value; Gainwell reverse termination fee of $185,330,219 plus up to $10 million expense reimbursement, guaranteed by The Veritas Capital Fund VII, L.P.

Other Digital / HealthTech fairness opinions

Livongo Health / Teladoc Health 2020 · 155.5x EV/EBITDA
Cerner / Oracle 2021 · 15.2x EV/EBITDA
Inovalon Holdings / Nordic Capital / Insight Partners 2021 · 26.9x EV/EBITDA
Nuance Communications / Microsoft 2021 · 45.9x EV/EBITDA
Change Healthcare / Optum 2021 · 13.8x EV/EBITDA
Medidata Solutions / Dassault Systemes 2019 · 32.4x EV/EBITDA

All Digital / HealthTech opinions → · Barclays opinions