K2M Group Holdings acquired by StrykerCorp.: fairness opinion by Piper Sandler
Announced August 29, 2018 · One-step merger · All cash ·
DEFM14A filed October 5, 2018
Medical Devices and Supplies Medical Devices
Enterprise value
$1.4B
equity $1.4B
EV / LTM EBITDA
92.0x
EBITDA $15.0M · 5% margin
EV / LTM revenue
4.14x
revenue $333M
DCF discount rate
10.3%–12.3%
Exit multiple
Deal terms
ConsiderationAll cash
Price per share$27.50
Premium25.0%
Premium basisclosing price on August 28, 2018 of $21.95
StructureOne-step merger
Termination fee$47.6M (3.4% of equity)
Reverse termination fee—
Go-shopNone
Outside date—
FilingDEFM14A · EDGAR index
Implied value per share by method vs. $27.50 offer
Selected companies — Medical Technology Financial Profile: EV / LTM revenue $23.86 – $25.42
Selected companies — Medical Technology Financial Profile: EV / 2018E revenue $24.19 – $25.37
Selected companies — Medical Technology Financial Profile: EV / 2019E revenue $24.58 – $25.73
Selected companies — Medical Technology Financial Profile: EV / LTM gross profit $27.55 – $27.89
Selected companies — Medical Technology Financial Profile: EV / 2018E gross profit $27.34 – $28.72
Selected companies — Medical Technology Financial Profile: EV / 2019E gross profit $27.78 – $29.04
Selected companies — Spine Business Profile: EV / LTM revenue $29.56
Selected companies — Spine Business Profile: EV / 2018E revenue $30.77
Selected companies — Spine Business Profile: EV / 2019E revenue $32.30
Selected companies — Spine Business Profile: EV / LTM gross profit $25.67
Selected companies — Spine Business Profile: EV / 2018E gross profit $26.88
Selected companies — Spine Business Profile: EV / 2019E gross profit $28.36
Precedent transactions — Financial Profile M&A: EV / LTM revenue $19.95 – $22.29
Precedent transactions — Financial Profile M&A: EV / FTM revenue $19.94 – $21.97
Precedent transactions — Financial Profile M&A: EV / LTM gross profit $24.96 – $26.53
Precedent transactions — Financial Profile M&A: EV / FTM gross profit $24.93 – $25.99
Precedent transactions — Spine Business Profile M&A: EV / LTM revenue $25.78 – $27.41
Precedent transactions — Spine Business Profile M&A: EV / FTM revenue $24.68 – $26.14
Precedent transactions — Spine Business Profile M&A: EV / LTM gross profit $26.28 – $26.97
Precedent transactions — Spine Business Profile M&A: EV / FTM gross profit $24.46 – $26.24
Discounted cash flow $23.90 – $31.69
Historical Trading Analysis $16.44 – $24.43
Premiums Paid Analysis $27.25 – $30.14
Other Information - Company Analyst Price Targets $20.00 – $29.00
Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.
Opinion of Piper Sandler to the target board
Delivered August 29, 2018 · Fee $21.4M ($20.4M contingent on closing), $1.0M on delivery of the opinion
Discounted cash flow assumptions
Discount rate10.3%–12.3%
BasisEstimated WACC of K2M using the capital asset pricing model
Terminal valueExit multiple
Perpetuity growth—
Exit multiple4.0x–5.0x Revenue (terminal value at December 31, 2022)
Projection periodJune 30, 2018 - December 31, 2022
Projections usedK2M management Projections
Implied value per share$23.90–$31.69
Unlevered free cash flows discounted back to June 30, 2018; merger consideration of $27.50 within implied range.
Selected public companies (8)
AtriCure, Inc. · Cantel Medical Corporation · Cardiovascular Systems, Inc. · Cutera, Inc. · Merit Medical Systems, Inc. · Varex Imaging Corporation · Globus Medical, Inc. · NuVasive, Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| Medical Technology Financial Profile: EV / LTM revenue | 2.0x | 4.6x | 6.6x | 4.3x–4.6x | $23.86–$25.42 |
| Medical Technology Financial Profile: EV / 2018E revenue | 2.0x | 4.3x | 6.2x | 4.1x–4.3x | $24.19–$25.37 |
| Medical Technology Financial Profile: EV / 2019E revenue | 2.0x | 3.8x | 5.6x | 3.7x–3.8x | $24.58–$25.73 |
| Medical Technology Financial Profile: EV / LTM gross profit | 5.0x | 7.8x | 10.1x | 7.7x–7.8x | $27.55–$27.89 |
| Medical Technology Financial Profile: EV / 2018E gross profit | 4.6x | 7.4x | 9.4x | 7.1x–7.4x | $27.34–$28.72 |
| Medical Technology Financial Profile: EV / 2019E gross profit | 3.8x | 6.6x | 8.3x | 6.3x–6.6x | $27.78–$29.04 |
| Spine Business Profile: EV / LTM revenue | 3.9x | 5.4x | 6.9x | 5.4x | $29.56 |
| Spine Business Profile: EV / 2018E revenue | 3.8x | 5.2x | 6.7x | 5.2x | $30.77 |
| Spine Business Profile: EV / 2019E revenue | 3.6x | 4.9x | 6.1x | 4.9x | $32.30 |
| Spine Business Profile: EV / LTM gross profit | 5.4x | 7.2x | 9.0x | 7.2x | $25.67 |
| Spine Business Profile: EV / 2018E gross profit | 5.2x | 6.9x | 8.7x | 6.9x | $26.88 |
| Spine Business Profile: EV / 2019E gross profit | 4.9x | 6.4x | 8.0x | 6.4x | $28.36 |
Selected precedent transactions (19)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2018-04-03 | PMG Intermediate Holding Corporation | NN, Inc. | — |
| 2018-03-12 | Cogentix Medical, Inc. | LABORIE Medical Technologies | — |
| 2017-12-07 | Entellus Medical, Inc. | Stryker | — |
| 2017-08-07 | NxStage Medical, Inc. | Fresenius Medical Holdings, Inc. | — |
| 2017-02-13 | ZELTIQ Aesthetics Inc. | Allergan plc | — |
| 2016-12-02 | Vascular Solutions, Inc. | Teleflex Incorporated | — |
| 2016-09-27 | EndoChoice Holdings, Inc. | Boston Scientific Corporation | — |
| 2016-06-07 | LDR Holding Corporation | Zimmer Biomet Holdings, Inc. | — |
| 2015-09-02 | Synergetics USA, Inc. | Valeant Pharmaceuticals International, Inc. | — |
| 2014-04-01 | AccessClosure Inc. | Cardinal Health Inc. | — |
| 2013-10-07 | Lanx, Inc. | Biomet, Inc. | — |
| 2013-09-04 | Rochester Medical Inc. | C. R. Bard Inc | — |
| 2012-06-04 | Origio a/s | The Cooper Companies, Inc. | — |
| 2012-03-12 | ZOLL Medical Corporation | Asahi Kasei Corporation | — |
| 2011-12-15 | SonoSite, Inc. | FujiFilm Holdings | — |
| 2011-05-24 | SeaSpine Holdings Corporation | Integra LifeSciences Holdings Corporation | — |
| 2017-10-24 | VEXIM | Stryker | — |
| 2016-01-05 | Ellipse Technologies, Inc. | NuVasive Inc. | — |
| 2011-05-16 | Orthovita, Inc. | Stryker | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| Financial Profile M&A: EV / LTM revenue | 1.6x | 3.6x | 7.7x | 3.6x–4.0x | $19.95–$22.29 |
| Financial Profile M&A: EV / FTM revenue | 1.4x | 3.2x | 6.1x | 3.2x–3.5x | $19.94–$21.97 |
| Financial Profile M&A: EV / LTM gross profit | 2.1x | 7.0x | 12.8x | 7.0x–7.4x | $24.96–$26.53 |
| Financial Profile M&A: EV / FTM gross profit | 1.8x | 6.0x | 10.6x | 6.0x–6.3x | $24.93–$25.99 |
| Spine Business Profile M&A: EV / LTM revenue | 1.6x | 4.7x | 9.3x | 4.7x–5.0x | $25.78–$27.41 |
| Spine Business Profile M&A: EV / FTM revenue | 1.4x | 4.2x | 6.2x | 3.9x–4.2x | $24.68–$26.14 |
| Spine Business Profile M&A: EV / LTM gross profit | 2.1x | 7.4x | 12.1x | 7.4x–7.6x | $26.28–$26.97 |
| Spine Business Profile M&A: EV / FTM gross profit | 1.8x | 6.3x | 8.4x | 5.9x–6.3x | $24.46–$26.24 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Historical Trading Analysis | Reviewed closing prices/volumes over 52 weeks ended August 28, 2018: price of $21.95 on 8/28/18 (25% premium), 1-day prior $22.80 (21%), 1-week prior $21.21 (30%), 4-week prior $20.37 (35%), 30-day VWAP $21.15 (30%), 60-day VWAP $21.85 (26%), 90-day VWAP $21.62 (27%); 1-year VWAP $20.18; 52-week intraday high $24.43 (6/13/18), low $16.44 (12/8/17); all-time intraday high $26.29 (6/1/15). | $16.44–$24.43 |
| Premiums Paid Analysis | 46 selected transactions announced since January 1, 2010 with North American public medical technology targets, EV > $250 million, excluding 100% equity consideration. Observed 1-day premiums: high 96%, 75th 42%, mean 32%, median 29%, 25th 16%, low (12)%; 1-week: high 81%, mean 33%, median 30%; 4-week: high 107%, mean 38%, median 34%. Implied per share: 1-day prior $29.37-$30.14; 30-day VWAP $27.25-$27.97; 4-weeks prior $27.28-$28.06. | $27.25–$30.14 |
| Other Information - Company Analyst Price Targets | Wall Street research analyst per share price targets as of August 28, 2018 ranged from $20.00 to $29.00, with an average of $25.88. Not relied upon in rendering the opinion; provided for informational purposes. | $20.00–$29.00 |
Fee currently estimated at approximately $21.4 million, contingent upon consummation of the merger, except for $1 million paid for rendering the fairness opinion, which is creditable against the total fee; opinion fee not contingent on consummation or conclusions. Piper Jaffray received approximately $2.9 million in aggregate consideration from prior K2M financing engagements in the past three years; no fees from Stryker in prior two years.
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Management projections
| Projection year | Year 1 | Year 2 | Year 3 | CAGR |
|---|---|---|---|---|
| Revenue | $376M | $423M | $476M | 12.5% |
| Revenue growth | 12.9% | 12.5% | 12.5% | |
| EBITDA | $31.0M | $50.0M | $73.0M | 53.5% |
| EBITDA growth | 106.7% | 61.3% | 46.0% | |
| EBITDA margin | 8% | 12% | 15% | |
| Implied EV / EBITDA | 44.5x | 27.6x | 18.9x |
Year-1 growth is against LTM at announcement ($333M revenue, $15.0M EBITDA); later years are year over year.
K2M management prepared unaudited stand-alone Projections for 2018-2022, provided to the Board, Piper Jaffray and Stryker. Revenue grows from $294 million in 2018 to $476 million in 2022; Adjusted EBITDA from $6 million (2018) to $73 million (2022); operating income from $(27) million to $38 million; net income from $(39) million to $31 million. Unlevered free cash flow was projected at $(6) million in 2019 rising to $52 million in 2022 (with $(3) million for the second half of 2018); historical 2016/2017 and LTM/FTM (June 30, 2018) figures were shown for comparison.
Process notes
Single financial advisor (Piper Jaffray & Co.) delivered a fairness opinion to the K2M Board on August 29, 2018; no special committee. All-cash $27.50 per share merger. Termination fee of $47.6 million equals approximately 3.4% of aggregate equity value (negotiated down from Stryker's initial 3.75% proposal; K2M's counter was 3.0%), and Stryker's request for expense reimbursement if stockholder approval failed was dropped. Enterprise value calculation used debt of ~$34 million (assuming conversion of Convertible Notes) and cash of ~$66 million as of June 30, 2018. Equity value of approximately $1.4 billion inferred from the disclosure that $47.6 million is ~3.4% of equity value (not separately stated in the filing).
Other Medical Devices and Supplies fairness opinions
- Invuity / StrykerCorp. 2018
- Cogentix Medical / Laborie 2018 · 101.9x EV/EBITDA
- Analogic / Altaris 2018 · 13.8x EV/EBITDA
- Wright Medical Group / StrykerCorp. 2019 · 14.6x EV/EBITDA
- CAS Medical Systems / Edwards Lifesciences 2019
- Osiris Therapeutics / Smith & Nephew 2019 · 28.8x EV/EBITDA
All Medical Devices and Supplies opinions → · Piper Sandler opinions