Medco Health Solutions acquired by Express Scripts Holding: fairness opinion by Citi
Deal terms
Each Medco share converted into $28.80 in cash plus 0.81 shares of New Express Scripts common stock. Based on the $52.54 closing price of Express Scripts common stock on July 20, 2011, the consideration represented approximately $71.36 per Medco share; based on the $46.83 closing price on November 15, 2011, approximately $66.73 per share. Citigroup's analyses used a per share Medco merger consideration of $70.69. Express Scripts stockholders receive one New Express Scripts share per Express Scripts share; former Express Scripts and Medco stockholders expected to own approximately 59% and 41% of New Express Scripts, respectively.
Implied value per share by method vs. $28.80 offer
Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.
Opinion of Citi to the acquirer board
Discounted cash flow assumptions
Without synergies: $75.72-$84.20 per Medco share. With approximately $1.1 billion of estimated synergies: $91.40-$102.72 per share. Stock-based compensation treated as a cash expense. Citigroup also performed a DCF of Express Scripts (June 30, 2011 - December 31, 2015) using discount rates of 7.48%-8.84% and the same 10.4x-11.1x LTM EBITDA terminal multiples, as part of a relative valuation analysis; no per-share range disclosed.
Selected public companies (3)
Medco Health Solutions, Inc. (MHS) · Express Scripts, Inc. (ESRX) · Catalyst Health Solutions, Inc. (CHSI)
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| Firm Value / LTM EBITDA | — | 11.1x | — | — | — |
| Firm Value / 2011E EBITDA (Medco, adjusted management case) | 9.9x | 10.3x | 12.4x | 9.9x–12.4x | $51.14–$66.23 |
| Firm Value / 2011E EBITDA (Medco, Wall Street consensus EBITDA) | 9.9x | 10.3x | 12.4x | 9.9x–12.4x | $51.81–$67.08 |
| Firm Value / 2012E EBITDA | — | 8.8x | — | — | — |
| Price / 2011E EPS | — | 16.2x | — | — | — |
| Price / 2012E EPS | — | 13.2x | — | — | — |
| Firm Value / 2011E EBITDA (Express Scripts, management estimate) | 9.9x | 10.3x | 12.4x | 9.9x–12.4x | $50.37–$63.59 |
| Firm Value / 2011E EBITDA (Express Scripts, Wall Street consensus EBITDA) | 9.9x | 10.3x | 12.4x | 9.9x–12.4x | $49.84–$62.93 |
Selected precedent transactions (5)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2011-03 | Walgreen Health Initiatives, Inc. | Catalyst Health Solutions, Inc. | 12.4x Firm Value / Standalone Target LTM EBITDA |
| 2009-04 | WellPoint Inc.'s NextRx subsidiaries | Express Scripts | 12.7x Firm Value / Standalone Target LTM EBITDA |
| 2006-11 | Caremark RX, Inc. | CVS Corporation | 15.5x Firm Value / Standalone Target LTM EBITDA |
| 2003-09 | AdvancePCS Inc. | Caremark RX, Inc. | 13.7x Firm Value / Standalone Target LTM EBITDA |
| 2002-02 | National Prescription Administrators, Inc. | Express Scripts | 12.2x Firm Value / Standalone Target LTM EBITDA |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| Firm Value / LTM Adjusted EBITDA | 12.2x | 12.7x | 15.5x | 12.2x–15.5x | $62.64–$82.07 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Historical Trading Analysis (Medco) | 52-week trading range of Medco common stock for period ended July 18, 2011 was $43.48 to $65.30; closing price on July 18, 2011 was $53.82. Merger consideration was above the 52-week trading range. | $43.48–$65.30 |
| Discounted Research Price Targets (Medco) | Twenty-one Wall Street analyst 12-month price targets for Medco ranged from $53.00 to $75.00 as of July 18, 2011; discounted at Medco's 9.7% cost of equity (CAPM) to $48.95-$69.69. Merger consideration was within the range of targets and above the discounted range. | $48.95–$69.69 |
| Premia Paid Analysis | U.S. healthcare services public targets with transaction value over $1.0 billion announced since 2001; interdecile range of one-day premia of 13.6% (10th percentile) to 50.4% (90th percentile) applied to Medco's July 18, 2011 closing price of $53.82. Citigroup also noted premia in the Caremark/AdvancePCS and CVS/Caremark PBM transactions exceeded the premium paid to Medco. | $61.14–$80.93 |
| Historical Trading Analysis (Express Scripts) | 52-week trading range of Express Scripts common stock for period ended July 18, 2011 was $42.12 to $60.66 per share. | $42.12–$60.66 |
| Discounted Research Price Targets (Express Scripts) | Twenty-one Wall Street analyst 12-month price targets for Express Scripts ranged from $53.00 to $72.00 as of July 18, 2011; discounted at Express Scripts' 8.9% cost of equity (CAPM) to $49.24-$67.39. | $49.24–$67.39 |
| Relative Valuation Analysis of Express Scripts and Medco | Compared relative values including historical stock price performance over five-year and one-year periods and relative DCF valuations (excluding synergies), computing the discounts each company's July 18, 2011 trading value bore to its DCF valuation. | — |
| Pro Forma Financial Effects Analysis | Citigroup evaluated certain potential pro forma financial effects of the mergers on Express Scripts based on information provided by Express Scripts management. | — |
Aggregate fee of approximately $15 million, $3.75 million payable upon delivery of the opinion and the remainder payable upon consummation of the mergers. A Citigroup commercial lending affiliate expects approximately $33 million of fees for financing roles. Since January 1, 2010, Citigroup received approximately $1.4 million in investment banking fees from Express Scripts.
Management projections
| Projection year | Year 1 | Year 2 | Year 3 | CAGR |
|---|---|---|---|---|
| Revenue | $59B | $57B | $57B | -2.0% |
| Revenue growth | -14.5% | -3.4% | -0.5% | |
| EBITDA | $3.4B | $3.5B | $4.0B | 7.9% |
| EBITDA growth | 9.5% | 2.5% | 13.6% | |
| EBITDA margin | 6% | 6% | 7% | |
| Implied EV / EBITDA | 8.8x | 8.6x | 7.6x |
Year-1 growth is against LTM at announcement ($69B revenue, $3.1B EBITDA); later years are year over year.
Medco management prepared stand-alone, pre-merger forecasts for FY2011-FY2014: revenue of $68,951.4M (2011) declining to $56,607.6M (2014), EBITDA of $3,112.8M (2011) rising to $3,967.7M (2014), and net income of $1,473.2M (2011) to $1,944.0M (2014). Express Scripts management prepared stand-alone forecasts in June 2011 for FY2011-FY2014: revenue of $45,477.4M (2011) to $51,227.7M (2014), adjusted EBITDA of $2,896.0M (2011) to $4,055.4M (2014), adjusted EPS of $3.21 (2011) to $5.55 (2014); FY2015 and FY2016 were extrapolated for use by Express Scripts' financial advisors. Express Scripts management also prepared an "adjusted Medco forecast," reducing Medco's 2014 EBITDA by approximately $400 million (~10%); Citigroup was instructed to use this Medco adjusted management case. Express Scripts subsequently issued revised 2011 guidance on October 6, 2011 (adjusted EPS of $2.95-$3.05 vs. original $3.15-$3.25).
Process notes
Other Managed Care fairness opinions
- HealthSpring / Cigna 2011 · 7.0x EV/EBITDA
- Coventry Health Care / Aetna 2012 · 8.9x EV/EBITDA
- AMERIGROUP / Wellpoint Healthcare Networks 2012 · 12.3x EV/EBITDA
- Catalyst Health Solutions / SXC Health Solutions 2012 · 19.1x EV/EBITDA
- Health Net / Centene 2015 · 9.3x EV/EBITDA
- Catamaran / United HealthGroup 2015 · 15.2x EV/EBITDA