Fairness opinions › Home-Based Services › 2017

LHC Group acquired by Almost Family: fairness opinion by Jefferies and Guggenheim Securities

Announced November 16, 2017 · Stock merger · All stock · DEFM14A filed February 13, 2018

Home-Based Services Home Health

Enterprise value

$1.3B

EV / LTM EBITDA

15.5x

EBITDA $85.6M · 8% margin

EV / LTM revenue

1.25x

revenue $1.1B

DCF discount rate

8.5%–10.0%

Perpetuity growth

Deal terms

ConsiderationAll stock

Price per share$62.93

Premium19.4%

Premium basisAlmost Family closing stock price of $52.70 on November 14, 2017

StructureStock merger

Termination fee$30.0M

Reverse termination fee$30.0M

Go-shopNone

Outside date—

FilingDEFM14A · EDGAR index

Each share of Almost Family common stock converted into 0.9150 shares of LHC Group common stock; implied merger price of $62.93 per Almost Family share based on LHC's closing price of $68.78 on November 14, 2017. Merger Sub (Hammer Merger Sub, Inc.) merges into Almost Family, which becomes a wholly owned subsidiary of LHC.

Implied value per share by method vs. $62.93 offer

Selected companies — EV / NTM Adj. EBITDA - NCI+SBC (Almost Family, Wall Street consensus) (Guggenheim Securities) $42.19 – $70.76

Selected companies — EV / NTM Adj. EBITDA - NCI+SBC (Almost Family, management estimates) (Guggenheim Securities) $47.72 – $79.47

Selected companies — Price / NTM Adj. EPS (Almost Family, Wall Street consensus) (Guggenheim Securities) $51.75 – $69.01

Selected companies — Price / NTM Adj. EPS (Almost Family, management estimates) (Guggenheim Securities) $59.71 – $79.63

Selected companies — EV / NTM Adj. EBITDA - NCI+SBC (LHC, Wall Street consensus) (Guggenheim Securities) $48.74 – $80.25

Selected companies — EV / NTM Adj. EBITDA - NCI+SBC (LHC, management estimates) (Guggenheim Securities) $51.33 – $84.34

Selected companies — Price / NTM Adj. EPS (LHC, Wall Street consensus) (Guggenheim Securities) $54.97 – $73.30

Selected companies — Price / NTM Adj. EPS (LHC, management estimates) (Guggenheim Securities) $59.43 – $79.25

Precedent transactions — Transaction EV / LTM Adj. EBITDA - NCI+SBC (Guggenheim Securities) $43.94 – $51.47

Discounted cash flow (Guggenheim Securities) $41.71 – $56.52

Almost Family Stock Price Range During Past Year (informational) (Guggenheim Securities) $39.34 – $62.95

Wall Street Equity Research Price Targets (informational) (Guggenheim Securities) $48.90 – $54.33

Illustrative Pro Forma Value of Merger Consideration (Guggenheim Securities) $60.34 – $66.75

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

Opinion of Jefferies to the acquirer board

Delivered November 15, 2017 · Fee $7.0M ($6.0M contingent on closing), $1.0M on delivery of the opinion

Discounted cash flow assumptions

Discount rate11.0%–12.0%

BasisAlmost Family WACC (LHC: 10.50%-11.50%)

Terminal valuePerpetuity growth

Perpetuity growth4.5%–5.5%

Exit multiple—

Projection period2017E-2022E

Projections usedLHC Management Projections and Almost Family Management Projections (as adjusted by LHC management), stand-alone without cost synergies

Implied value per share$37.73–$52.87

Almost Family DCF: discount rates 11.00%-12.00%, perpetuity growth 4.5%-5.5%, implied $37.73-$52.87 per share; tax rate 39.5%. LHC DCF: discount rates 10.50%-11.50%, same perpetuity growth, implied $48.86-$70.04 per share; tax rate 41.4%. Implied exchange ratio range 0.5387x-1.0822x vs. 0.9150x.

Selected public companies (5)

Almost Family, Inc. (AFAM) · LHC Group, Inc. (LHCG) · Addus HomeCare Corporation · Amedisys, Inc. · Chemed Corporation

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
TEV / CY2017E Adjusted EBITDA-NCI (Almost Family)	11.3x	—	16.2x	13.5x–15.5x	$51.92–$61.02
TEV / CY2018E Adjusted EBITDA-NCI (Almost Family)	10.2x	—	14.6x	12.0x–13.5x	$59.90–$68.57
TEV / CY2017E Adjusted EBITDA-NCI+SBC (Almost Family)	10.6x	—	15.2x	12.5x–14.0x	$50.00–$57.14
TEV / CY2018E Adjusted EBITDA-NCI+SBC (Almost Family)	9.3x	—	14.6x	11.0x–12.5x	$56.49–$65.49
TEV / CY2017E Adjusted EBITDA-NCI (LHC)	11.3x	—	16.2x	14.0x–16.0x	$56.06–$65.42
TEV / CY2018E Adjusted EBITDA-NCI (LHC)	10.2x	—	14.6x	12.5x–14.0x	$65.82–$74.86
TEV / CY2017E Adjusted EBITDA-NCI+SBC (LHC)	10.6x	—	15.2x	13.5x–15.0x	$58.12–$65.63
TEV / CY2018E Adjusted EBITDA-NCI+SBC (LHC)	9.3x	—	14.6x	11.5x–13.0x	$63.66–$73.20
Price / CY2017E Adjusted EPS (Almost Family)	20.7x	—	28.6x	24.5x–27.0x	$54.95–$60.56
Price / CY2018E Adjusted EPS (Almost Family)	18.8x	—	26.1x	20.5x–23.5x	$62.85–$72.04
Price / CY2017E Adjusted EPS (LHC)	20.7x	—	28.6x	25.0x–27.5x	$59.72–$65.69
Price / CY2018E Adjusted EPS (LHC)	18.8x	—	26.1x	22.0x–25.0x	$66.03–$75.04

Other analyses

Analysis	Summary	Implied per share
Implied Exchange Ratio - Selected Public Companies (Adjusted EBITDA-NCI)	2017E implied exchange ratio range 0.7937x-1.0886x; 2018E 0.8001x-1.0418x vs. merger exchange ratio of 0.9150x.	—
Implied Exchange Ratio - Selected Public Companies (Adjusted EBITDA-NCI+SBC)	2017E implied exchange ratio range 0.7618x-0.9831x; 2018E 0.7717x-1.0288x vs. 0.9150x.	—
Implied Exchange Ratio - P/E Analysis	2017E implied exchange ratio range 0.8366x-1.0141x; 2018E 0.8375x-1.0910x vs. 0.9150x.	—
Relative Contribution Analysis (informational)	Contributions to 2017E/2018E net revenue, Adjusted EBITDA-NCI, Adjusted EBITDA-NCI+SBC and Adjusted Net Income; LHC contributed 56.1%-59.0%, Almost Family 41.0%-43.9%; implied exchange ratio reference range 0.8679x-1.0089x vs. 0.9150x.	—
Historical Exchange Ratio Analysis (informational)	Exchange ratio at 11/14/17 close of 0.7662x; last one year high 1.0391x, low 0.6186x, average 0.8829x; two-year average 0.9376x; three-year average 0.9786x vs. 0.9150x.	—

Aggregate fee of approximately $7.0 million; $1.0 million payable upon delivery of opinion and approximately $6.0 million contingent upon consummation of the merger. Jefferies advised LHC (the acquirer); opinion addressed fairness of the exchange ratio to LHC.

Opinion of Guggenheim Securities to the target board

Delivered November 15, 2017 · Fee $9.8M ($7.3M contingent on closing)

Discounted cash flow assumptions

Discount rate8.5%–10.0%

BasisAlmost Family WACC (LHC: 8.00%-9.50%)

Terminal valuePerpetuity growth

Perpetuity growth1.8%–2.3%

Exit multiple—

Projection period2017E-2022E

Projections usedFive-year financial projections for Almost Family provided by Almost Family senior management; LHC projections provided by LHC senior management (approved by Almost Family management)

Implied value per share$41.71–$56.52

Almost Family stand-alone DCF $41.71-$56.52 per share (WACC 8.50%-10.00%); LHC stand-alone DCF $49.61-$69.23 per share (WACC 8.00%-9.50%). Terminal values cross-checked against implied terminal year Adj. EBITDA-NCI+SBC multiples. Implied exchange ratio range 0.6025-1.1392 vs. 0.9150.

Selected public companies (5)

Amedisys, Inc. · Addus HomeCare Corporation · Chemed Corporation · Almost Family, Inc. (AFAM) · LHC Group, Inc. (LHCG)

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
EV / NTM Adj. EBITDA - NCI+SBC (Almost Family, Wall Street consensus)	9.4x	11.4x	14.8x	9.4x–14.8x	$42.19–$70.76
EV / NTM Adj. EBITDA - NCI+SBC (Almost Family, management estimates)	9.4x	11.4x	14.8x	9.4x–14.8x	$47.72–$79.47
Price / NTM Adj. EPS (Almost Family, Wall Street consensus)	20.8x	23.6x	27.7x	20.8x–27.7x	$51.75–$69.01
Price / NTM Adj. EPS (Almost Family, management estimates)	20.8x	23.6x	27.7x	20.8x–27.7x	$59.71–$79.63
EV / NTM Adj. EBITDA - NCI+SBC (LHC, Wall Street consensus)	9.4x	11.4x	14.8x	9.4x–14.8x	$48.74–$80.25
EV / NTM Adj. EBITDA - NCI+SBC (LHC, management estimates)	9.4x	11.4x	14.8x	9.4x–14.8x	$51.33–$84.34
Price / NTM Adj. EPS (LHC, Wall Street consensus)	20.8x	23.6x	27.7x	20.8x–27.7x	$54.97–$73.30
Price / NTM Adj. EPS (LHC, management estimates)	20.8x	23.6x	27.7x	20.8x–27.7x	$59.43–$79.25

Other analyses

Analysis	Summary	Implied per share
Implied Merger Premia / Multiples	Implied merger price $62.93 per Almost Family share: 19.4% premium to 11/14/17 close of $52.70, (0.0)% vs. past year's high of $62.95, 27.8% vs. 90-day VWAP of $49.23. Transaction EV / Adj. EBITDA-NCI+SBC of 15.1x LTM, 13.3x NTM consensus, 12.0x NTM management estimates.	—
Almost Family Stock Price Range During Past Year (informational)	52-week trading range of $39.34-$62.95 (LHC: $41.66-$76.14).	$39.34–$62.95
Wall Street Equity Research Price Targets (informational)	Almost Family analyst targets $54.00-$60.00, discounted at 10.4% cost of equity to $48.90-$54.33; LHC targets $63.00-$83.00 discounted at 9.9% to $57.33-$75.53.	$48.90–$54.33
Historical Trading Market Exchange Ratio Analysis	Merger exchange ratio 0.9150 vs. closing trading exchange ratio 0.7662 at 11/14/17 (19.4% premium), past year average 0.8836 (3.6%), past two years average 0.9375 ((2.4)%).	—
Implied Exchange Ratio Analysis	Overall implied exchange ratio reference range 0.5167-1.5482 vs. merger exchange ratio 0.9150; DCF 0.6025-1.1392; consensus NTM EBITDA 0.5257-1.4517; management NTM EBITDA 0.5657-1.5482; consensus NTM EPS 0.7059-1.2555; management NTM EPS 0.7535-1.3401; past-year stock price ranges 0.5167-1.5112; analyst price targets 0.6474-0.9477.	—
Illustrative Has/Gets Analysis	Pro forma intrinsic value impact to Almost Family holders ranging from 1.7% dilution to 27.9% accretion across perpetuity growth rates of 1.75%-2.25%, using WACCs of 8.50%-10.00% (Almost Family stand-alone) and 7.75%-9.25% (combined company), with and without cost and capital markets synergies.	—
Contribution Analysis (informational)	Compared Almost Family's and LHC's Adj. EBITDA-NCI+SBC and adjusted net income contribution percentages, leverage-adjusted, with merger-implied ownership splits of 41.5% / 58.5%, both with and without synergies.	—
Illustrative Pro Forma Value of Merger Consideration	Illustrative pro forma market-based value of merger consideration of $66.75 per share and pro forma DCF-based value of $60.34 per share, versus implied merger price of $62.93.	$60.34–$66.75

Cash transaction fee (percentage of aggregate merger value) estimated at $9,762,658 payable upon consummation; a $2,440,665 cash milestone fee became payable upon execution of the definitive agreement and will be credited against the transaction fee.

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Management projections

Projection year	Year 1	Year 2	Year 3	Year 4	Year 5	CAGR
Revenue	$1.2B	$1.3B	$1.4B	$1.6B	$1.7B	8.6%
Revenue growth	14.8%	8.6%	8.6%	8.7%	8.6%
EBITDA	$110M	$127M	$144M	$164M	$185M	13.8%
EBITDA growth	28.6%	14.9%	13.6%	14.3%	12.5%
EBITDA margin	9%	10%	10%	10%	11%
Implied EV / EBITDA	12.1x	10.5x	9.3x	8.1x	7.2x

Year-1 growth is against LTM at announcement ($1.1B revenue, $85.6M EBITDA); later years are year over year.

Both advisors used management projections for calendar years 2017 through 2022 for each of LHC and Almost Family (Almost Family's projections were adjusted by LHC management for Jefferies' use). Jefferies' contribution analysis shows LHC net revenue of $1,064.8 million (2017E) and $1,222.1 million (2018E) with Adjusted EBITDA-NCI of $85.6 million and $110.1 million, and Almost Family net revenue of $803.9 million (2017E) and $850.2 million (2018E) with Adjusted EBITDA-NCI of $65.4 million and $83.2 million. Guggenheim also reviewed jointly prepared cost and combination synergy estimates, which Jefferies excluded from its stand-alone DCF analyses.

Process notes

Merger of equals-style stock deal: LHC Group is the legal acquirer/issuer and Almost Family is the target, with Almost Family stockholders receiving 0.9150 LHC shares per share (41.5%/58.5% ownership split). Two fairness opinions, both dated November 15, 2017: Jefferies opined to the LHC board that the exchange ratio was fair to LHC (the acquirer), and Guggenheim Securities opined to the Almost Family board that the exchange ratio was fair to Almost Family stockholders (excluding LHC and affiliates). Reciprocal $30 million termination fees payable by either party, plus expense reimbursement of up to $5 million; neither party may terminate to accept a superior proposal. Guggenheim was not asked to and did not solicit third-party indications of interest. Guggenheim's precedent transactions analysis covered eight selected home healthcare transactions but the filing does not name them.

Other Home-Based Services fairness opinions

Almost Family / LHC Group 2017 · 14.3x EV/EBITDA
Gentiva Health Services / Kindred Healthcare Services 2014 · 9.7x EV/EBITDA
LHC Group / UnitedHealth Group 2022 · 20.8x EV/EBITDA
Lincare / Linde AG 2012 · 9.1x EV/EBITDA
Amedisys / UnitedHealth Group 2023 · 15.2x EV/EBITDA
Odyssey Healthcare / Gentiva Health Services 2010 · 9.8x EV/EBITDA

All Home-Based Services opinions → · Jefferies opinions · Guggenheim Securities opinions