Fairness opinions › Home-Based Services › 2012

Lincare acquired by Linde AG: fairness opinion by J.P. Morgan

Announced July 2, 2012 · Tender offer · All cash · SC 14D9 filed July 11, 2012

Home-Based Services Home Oxygen / Respiratory

Enterprise value

$4.6B

EV / LTM EBITDA

9.1x

EBITDA $504M · 25% margin

EV / LTM revenue

2.25x

revenue $2.0B

DCF discount rate

9.0%–10.0%

Perpetuity growth

Deal terms

ConsiderationAll cash

Price per share$41.50

Premium—

Premium basis—

StructureTender offer

Termination fee$155M

Reverse termination fee—

Go-shopNone

Outside date—

FilingSC 14D9 · EDGAR index

Implied value per share by method vs. $41.50 offer

Selected companies — FV / 2012E EBITDA $21.70 – $38.85

Selected companies — P / 2012E EPS $24.40 – $36.00

Precedent transactions — TV / LTM EBITDA (twelve months ended March 31, 2012) $28.80 – $41.85

Discounted cash flow $25.90 – $33.35

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

Opinion of J.P. Morgan to the target board

Delivered July 1, 2012 · Fee $34.0M ($34.0M contingent on closing), $1.0M on delivery of the opinion

Discounted cash flow assumptions

Discount rate9.0%–10.0%

BasisChosen based upon an analysis of the capital structures and costs of equity and debt of the Company and its publicly traded comparable companies

Terminal valuePerpetuity growth

Perpetuity growth2.0%–3.0%

Exit multiple—

Projection period2012E-2021E

Projections usedCompany management forecasts for 2012-2015 and extrapolated projections for 2016-2021 reviewed and approved by management

Implied value per share$25.90–$33.35

Stock-based compensation treated as a cash expense; terminal value calculated at end of ten-year period ending 2021

Selected public companies (11)

Rotech Healthcare Inc. · BioScrip, Inc. · Gentiva Health Services Inc. · Amedisys Inc. · Almost Family Inc. · LHC Group, Inc. · HealthSouth Corp. · Davita Inc. · Invacare Corp. · Hill-Rom Holdings, Inc. · Getinge AB

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
FV / 2012E EBITDA	4.6x	—	12.1x	5.0x–8.5x	$21.70–$38.85
P / 2012E EPS	5.8x	—	15.8x	10.5x–15.5x	$24.40–$36.00

Selected precedent transactions (7)

Date	Target	Acquirer	Multiple
2012-01	Air Products Continental European Homecare	Linde AG	9.9x TV/LTM EBITDA
2010-07	American HomePatient, Inc.	Highland Capital Management, L.P.	7.2x TV/LTM EBITDA
2010-01	Critical Homecare Solutions Holdings, Inc.	Bioscrip, Inc.	8.8x TV/LTM EBITDA
2008-06	Apria Healthcare Group Inc.	The Blackstone Group	5.1x TV/LTM EBITDA
2007-10	Coram, Inc.	Apria Healthcare Group Inc.	15.5x TV/LTM EBITDA
2007-07	Option Care, Inc.	Walgreen Co.	17.5x TV/LTM EBITDA
2007-02	Critical Homecare Solutions Holdings, Inc.	MBF Healthcare Acquisition Corp.	9.8x TV/LTM EBITDA

Multiple	Low	Median	High	Range applied	Implied per share
TV / LTM EBITDA (twelve months ended March 31, 2012)	5.1x	—	17.5x	7.0x–10.0x	$28.80–$41.85

Transaction fee of approximately $34 million payable if the Transactions are consummated, of which $1.0 million was earned upon delivery of the opinion; expense reimbursement and indemnification. Engagement letter dated May 15, 2012, effective as of March 7, 2012.

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Management projections

Projection year	Year 1	Year 2	Year 3	CAGR
Revenue	$2.2B	$2.4B	$2.6B	9.0%
Revenue growth	7.2%	7.9%	10.2%
EBITDA	$535M	$563M	$637M	9.1%
EBITDA growth	6.2%	5.2%	13.1%
EBITDA margin	24%	24%	25%
Implied EV / EBITDA	8.6x	8.2x	7.2x

Year-1 growth is against LTM at announcement ($2.0B revenue, $504M EBITDA); later years are year over year.

Management provided non-public stand-alone forecasts for 2012-2015, with revenue of $2,040M in 2012P rising to $2,598M in 2015P and EBITDA of $504M rising to $637M; free cash flow of $202M in 2012P and $294M in 2015P. For J.P. Morgan's DCF, these forecasts were extended by extrapolated projections for 2016-2021 approved by management, with revenue reaching $3,366M and EBITDA $673M in 2021E, and unlevered free cash flow of $100M in 2012E growing to $265M in 2021E (2012 free cash flow for discounting adjusted to $79M for a $57M assumed acquisition outflow).

Process notes

Single financial advisor (J.P. Morgan) to the Lincare board; opinion rendered orally July 1, 2012 and confirmed in writing the same date. Competitive process with at least one other bidder ("Party A") which submitted a revised offer; parties asked for best and final offers by July 1, 2012. Termination fee of $155 million plus expense reimbursement up to $10 million (creditable against the termination fee); the initial draft merger agreement proposed a fee of 2% of equity value. J.P. Morgan disclosed that its commercial banking and asset management affiliates provide services to Parent (Linde). Offerors indicated intent to enter into employment arrangements with certain members of management, though none were in place as of the filing date.

Other Home-Based Services fairness opinions

Gentiva Health Services / Kindred Healthcare Services 2014 · 9.7x EV/EBITDA
Odyssey Healthcare / Gentiva Health Services 2010 · 9.8x EV/EBITDA
Almost Family / LHC Group 2017 · 14.3x EV/EBITDA
LHC Group / Almost Family 2017 · 15.5x EV/EBITDA
LHC Group / UnitedHealth Group 2022 · 20.8x EV/EBITDA
Amedisys / UnitedHealth Group 2023 · 15.2x EV/EBITDA

All Home-Based Services opinions → · J.P. Morgan opinions