Fairness opinions › Physician Groups › 2015

IPC Healthcare acquired by TeamHealth: fairness opinion by Credit Suisse and Evercore

Announced August 4, 2015 · One-step merger · All cash · DEFM14A filed October 15, 2015

Physician Groups Facility-Based

Enterprise value

$1.6B

EV / LTM EBITDA

22.5x

EBITDA $72.0M · 9% margin

EV / LTM revenue

2.14x

revenue $759M

DCF discount rate

6.5%–7.5%

Exit multiple

Deal terms

ConsiderationAll cash

Price per share$80.25

Premium—

Premium basis—

StructureOne-step merger

Termination fee$47.0M (3.0% of equity)

Reverse termination fee—

Go-shopNone

Outside dateMarch 31, 2016

FilingDEFM14A · EDGAR index

Implied value per share by method vs. $80.25 offer

Selected companies — EV / CY2015E EBITDA (Credit Suisse) $45.54 – $62.49

Selected companies — EV / CY2016E EBITDA (Credit Suisse) $45.54 – $62.49

Precedent transactions — EV / LTM EBITDA (as of June 30, 2015) (Credit Suisse) $34.65 – $44.12

Discounted cash flow (Credit Suisse) $55.45 – $81.39

Wall Street analyst price targets (Credit Suisse) $46.00 – $70.00

Premiums paid analysis (Credit Suisse) $66.54 – $77.63

52-week trading range (Credit Suisse) $36.12 – $58.98

DCF including BPCI Additional Estimates (Credit Suisse) $56.23 – $98.51

Selected companies — EV / CY2015E EBITDA (Evercore) $52.50 – $59.71

Selected companies — EV / CY2016E EBITDA (Evercore) $51.02 – $59.54

Selected companies — P / CY2015E EPS (Evercore) $54.64 – $65.56

Selected companies — P / CY2016E EPS (Evercore) $48.47 – $60.59

Precedent transactions — Aggregate Value / LTM EBITDA (Evercore) $34.67 – $42.27

Precedent transactions — Aggregate Value / LTM EBITDA plus BPCI value ($0.00-$15.27 per share) (Evercore) $34.67 – $57.54

Discounted cash flow (Evercore) $55.03 – $72.48

Trading Range Analysis (Evercore) $36.12 – $58.98

Equity Research Analysts' Price Targets (Evercore) $43.61 – $63.60

Analysis of Historical Premiums Paid (Evercore) $66.54 – $77.63

BPCI incremental value analysis (Evercore) $0.00 – $16.54

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

Opinion of Credit Suisse to the target board

Delivered August 3, 2015

Discounted cash flow assumptions

Discount rate6.5%–7.5%

BasisWACC

Terminal valueExit multiple

Perpetuity growth—

Exit multiple11.5x–15.5x LTM 2019E EBITDA

Projection periodthrough 2019

Projections usedManagement Projections (excluding BPCI)

Implied value per share$55.45–$81.39

A separate DCF of the BPCI Additional Estimates (terminal multiples 11.5x-15.5x of incremental LTM June 30, 2018E EBITDA, discount rates 6.5%-7.5%, assumed incremental EBITDA of $10-$20 million per year and equal probabilities of 0%, 25%, 50%, 75%, 100% of terminal value), taken together with the base DCF, indicated an implied range of $56.23 to $98.51 per share.

Selected public companies (4)

Envision Healthcare Holdings, Inc. · Mednax, Inc. · Team Health Holdings, Inc. · AMSURG Corp.

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
EV / CY2015E EBITDA	13.1x	—	16.5x	12.5x–15.5x	$45.54–$62.49
EV / CY2016E EBITDA	11.7x	—	14.4x	11.0x–14.0x	$45.54–$62.49

Selected precedent transactions (13)

Date	Target	Acquirer	Multiple
2015-05	Virtual Radiologic Corporation	Mednax, Inc.	11.1x EV / LTM EBITDA
2015-01	VISTA Staffing Solutions Inc.	Envision Healthcare Holdings, Inc.	9.8x EV / LTM EBITDA
2014-11	Cogent Healthcare Inc.	Fresenius Medical Care AG & Co. KGaA	—
2014-06	Sound Inpatient Physicians, Inc.	Fresenius Medical Care AG & Co. KGaA	—
2014-05	Sheridan Healthcare, Inc.	AMSURG Corp.	12.2x EV / LTM EBITDA
2014-05	Healogics Holding Corp.	Clayton, Dubilier & Rice LLC	10.2x EV / LTM EBITDA
2012-10	CHG Healthcare Services	Leonard Green & Partners LP / Ares Management LLC	12.6x EV / LTM EBITDA
2011-02	Emergency Medical Services Corporation	Clayton, Dubilier & Rice LLC	9.7x EV / LTM EBITDA
2007-05	Sheridan Healthcare, Inc.	Hellman & Friedman, LLC	12.1x EV / LTM EBITDA
2005-10	Team Health, Inc.	The Blackstone Group L.P.	9.2x EV / LTM EBITDA
2005-10	The MHA Group, Inc.	AMN Healthcare Services, Inc.	11.0x EV / LTM EBITDA
2004-12	American Medical Response, Inc. and EmCare, Inc. (Emergency Medical Services Corporation)	Onex Corporation	6.1x EV / LTM EBITDA
2004-11	Sheridan Healthcare, Inc.	J.W. Childs Associates	9.3x EV / LTM EBITDA

Multiple	Low	Median	High	Range applied	Implied per share
EV / LTM EBITDA (as of June 30, 2015)	6.1x	—	12.6x	10.0x–12.5x	$34.65–$44.12

Other analyses

Analysis	Summary	Implied per share
Wall Street analyst price targets	Review of publicly available equity research analyst stock price targets.	$46.00–$70.00
Premiums paid analysis	Premiums paid in selected transactions announced January 1, 2005 to June 30, 2015 with transaction values between $250 million and $2 billion; applied 20%-40% premium to IPC's July 31, 2015 closing price.	$66.54–$77.63
52-week trading range	52-week intraday low and high prices of IPC common stock as of July 31, 2015.	$36.12–$58.98
DCF including BPCI Additional Estimates	DCF of potential incremental equity value from IPC's participation in BPCI combined with the base DCF on Management Projections.	$56.23–$98.51

Filing sections provided do not disclose Credit Suisse's fee arrangement.

Opinion of Evercore to the target board

Delivered August 3, 2015 · Fee $3.0M ($1.5M contingent on closing), $1.0M on delivery of the opinion

Discounted cash flow assumptions

Discount rate8.5%–10.5%

BasisWACC derived using the capital asset pricing model plus a size premium, based on capital structures and costs of equity and debt of IPC and certain publicly traded peers

Terminal valueExit multiple

Perpetuity growth—

Exit multiple10.0x–12.0x projected terminal 2020 non-GAAP EBITDA

Projection period2016-2019

Projections usedManagement Projections; Organic Growth Sensitivity Case; Management Projections plus BPCI Sensitivity Cases

Implied value per share$55.03–$72.48

Organic Growth Sensitivity Case implied $48.39-$60.97 per share; Management Projections implied $55.03-$72.48; Management Projections plus BPCI Sensitivity Cases implied $55.03-$87.67. Mid-year convention, discounted to December 31, 2015. BPCI valued separately using BPCI Core Estimates with a 3.0% perpetuity growth terminal value discounted at 9.5%, savings opportunity 0.0%-8.8% of CMS program spend ($0-$36.1 million incremental), terminal value probability 0%-100%, producing equity value impact of $0 to $288.1 million, or $0.00 to $16.54 per share.

Selected public companies (4)

Envision Healthcare Holdings, Inc. · MEDNAX, Inc. · Amsurg Corporation · Team Health Holdings, Inc.

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
EV / CY2015E EBITDA	—	—	—	14.5x–16.5x	$52.50–$59.71
EV / CY2016E EBITDA	—	—	—	12.5x–14.5x	$51.02–$59.54
P / CY2015E EPS	—	—	—	25.0x–30.0x	$54.64–$65.56
P / CY2016E EPS	—	—	—	20.0x–25.0x	$48.47–$60.59

Selected precedent transactions (10)

Date	Target	Acquirer	Multiple
—	vRad	MEDNAX, Inc.	—
—	Vista Staffing Solutions	Envision Healthcare Holdings, Inc.	—
—	Sound Physicians	Fresenius Medical Care	—
—	Sheridan Healthcare	Amsurg Corp.	—
—	Healogics Holding Corp.	Clayton Dubilier & Rice	—
—	CHG Healthcare Services Inc.	Leonard Green & Partners LP / Ares Management LLC	—
—	Emergency Medical Services Corporation	Clayton Dubilier & Rice	—
—	Sheridan Healthcare, Inc.	Hellman & Friedman LLC	—
—	Team Health Holdings, Inc.	The Blackstone Group L.P.	—
—	Merritt Hawkins (f/k/a MHA Group)	AMN Healthcare	—

Multiple	Low	Median	High	Range applied	Implied per share
Aggregate Value / LTM EBITDA	—	—	—	10.0x–12.0x	$34.67–$42.27
Aggregate Value / LTM EBITDA plus BPCI value ($0.00-$15.27 per share)	—	—	—	10.0x–12.0x	$34.67–$57.54

Other analyses

Analysis	Summary	Implied per share
Trading Range Analysis	52-week low and high trading prices per share for the period ending July 31, 2015, versus the $55.45 closing price on July 31, 2015.	$36.12–$58.98
Equity Research Analysts' Price Targets	One-year forward analyst price targets published prior to July 31, 2015, discounted at a 10.1% cost of equity for 1 year.	$43.61–$63.60
Analysis of Historical Premiums Paid	54 all-cash change of control transactions for U.S. companies with transaction values between $1.0 and $1.5 billion from January 14, 2010 to July 1, 2015; mean/median 1-day premiums of 31.2%/27.8%, 1-week 34.9%/31.7%, 4-week 40.3%/36.2%. Applied selected premiums of 20.0%-40.0% to IPC's July 31, 2015 closing price.	$66.54–$77.63
BPCI incremental value analysis	Sensitivity of BPCI value based on savings opportunity of 0.0%-8.8% of CMS program spend and 0%-100% terminal value probability; equity value impact of $0 to $288.1 million.	$0.00–$16.54

Opinion fee of $1,000,000 payable on delivery of the opinion letter; milestone fee of $500,000 paid upon public announcement of the merger; success fee of $1,500,000 contingent upon closing. No fees paid to Evercore by IPC in the prior two years.

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Management projections

Projection year	Year 1	Year 2	Year 3	Year 4	CAGR
Revenue	$869M	$1.0B	$1.2B	$1.4B	16.0%
Revenue growth	14.5%	16.0%	16.1%	16.1%
EBITDA	$88.0M	$105M	$124M	$146M	18.4%
EBITDA growth	22.2%	19.3%	18.1%	17.7%
EBITDA margin	10%	10%	11%	11%
Implied EV / EBITDA	18.4x	15.5x	13.1x	11.1x

Year-1 growth is against LTM at announcement ($759M revenue, $72.0M EBITDA); later years are year over year.

IPC management prepared Management Projections covering 2016-2019 (with a terminal 2020 non-GAAP EBITDA estimate), which excluded the potential financial implications of IPC's participation in the CMS Bundled Payments for Care Improvement (BPCI) program. Separate BPCI Core Estimates and BPCI Additional Estimates were provided, assuming incremental EBITDA of roughly $10-$20 million per year initially (Credit Suisse) and illustrative incremental EBITDA from 2016 to 2018 with a 3% annual CMS program spend increase and 2% operating expense increase (Evercore); management deemed these highly speculative given BPCI's scheduled 2017 expiration. Evercore also used an Organic Growth Sensitivity Case assuming no acquired growth over the projection period, and BPCI Sensitivity Cases; the resulting implied equity values per share were $48.39-$60.97 (Organic Growth), $55.03-$72.48 (Management Projections) and $55.03-$87.67 (Management Projections plus BPCI Sensitivity Cases).

Process notes

Two fairness opinions delivered to the IPC board on August 3, 2015 (Credit Suisse and Evercore). Credit Suisse ran the sale process and solicited third parties; Evercore was not authorized to solicit interest. Competitive auction between Team Health and 'Party A'; best-and-final bids of $75/share from each, with Team Health ultimately at $80.25. Termination fee of $47 million equals approximately 3% of aggregate equity value. Analyses include a separate valuation of IPC's participation in the CMS Bundled Payments for Care Improvement (BPCI) program, treated as highly speculative. Credit Suisse's analyses excluded any potential impact from DOJ litigation against IPC.

Other Physician Groups fairness opinions

Network Medical Management / Apollo Medical Holdings 2016 · 9.5x EV/EBITDA
Team Health Holdings / Blackstone 2016 · 11.5x EV/EBITDA
Envision Healthcare Holdings / AmSurg 2016 · 11.2x EV/EBITDA
USMD Holdings / WellMed Medical Management 2016 · 15.5x EV/EBITDA
ExamWorks Group / Leonard Green & Partners 2016 · 11.5x EV/EBITDA
Envision Healthcare Holdings / KKR 2018 · 10.0x EV/EBITDA

All Physician Groups opinions → · Credit Suisse opinions · Evercore opinions