Fairness opinions › Medical Devices and Supplies › 2014

Medical Action Industries acquired by Owens & Minor: fairness opinion by Canaccord Genuity

Announced June 25, 2014 · One-step merger · All cash · DEFM14A filed August 25, 2014
Medical Devices and Supplies Medical Supplies
Enterprise value
$207M
EV / LTM EBITDA
13.8x
EBITDA $15.0M · 5% margin
EV / LTM revenue
0.68x
revenue $305M
DCF discount rate
17.7%
Exit multiple

Deal terms

ConsiderationAll cash
Price per share$13.80
Premium94.4%
Premium basisClosing price of $7.10 on June 19, 2014 (1 day prior)
StructureOne-step merger
Termination fee$9.3M
Reverse termination fee$9.3M
Go-shopNone
Outside date—
FilingDEFM14A · EDGAR index

Implied value per share by method vs. $13.80 offer

Selected companies — EV / LTM Adjusted EBITDA $8.58 – $9.04
Selected companies — EV / CY2014E Adjusted EBITDA $9.86 – $10.29
Precedent transactions — EV / LTM Adjusted EBITDA $8.75 – $9.02
Discounted cash flow $10.03 – $10.48
Premiums Paid Analysis $8.84 – $11.58

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

Opinion of Canaccord Genuity to the target board

Delivered June 23, 2014 · Fee $3.3M, $0.3M on delivery of the opinion

Discounted cash flow assumptions

Discount rate17.7%
BasisWACC derived via capital asset pricing model; adjusted unlevered beta of 1.819, equity risk premium of 6.5%, effective tax rate of 37.0%, risk free rate of 3.2%
Terminal valueExit multiple
Perpetuity growth—
Exit multiple10.2x–10.8x 2018E Adjusted EBITDA (mean and median EV/LTM adjusted EBITDA multiples of selected peer companies)
Projection periodFY2015-FY2018
Projections usedEstimates and projections approved by Company management
Implied value per share$10.03–$10.48

Unlevered FCF calculated by tax-effecting EBIT, adding D&A and stock-based compensation, subtracting change in non-cash working capital and capex. Added cash of $38.5 million and subtracted debt and capital leases of $13.5 million (pro forma for Medegen/Patient Care divestiture); share count 16.391 million shares plus dilution from 1.354 million options at $8.70 weighted-average exercise price.

Selected public companies (7)

Steris Corp. · Hill-Rom Holdings, Inc. · Owens & Minor, Inc. · Synergy Health plc · CONMED Corporation · Merit Medical Systems, Inc. · ICU Medical, Inc.

MultiplePeer lowPeer medianPeer highRange appliedImplied per share
EV / LTM Adjusted EBITDA8.8x10.2x12.9x 10.2x–10.8x $8.58–$9.04
EV / CY2014E Adjusted EBITDA8.1x10.5x11.5x 10.0x–10.5x $9.86–$10.29

Selected precedent transactions (7)

DateTargetAcquirerMultiple
—TRUMPF Medical Systems, Inc.Hill-Rom Holdings, Inc.—
—BarrierSafe Solutions International, Inc.Ansell Ltd.—
—Thomas Medical Products, Inc.Merit Medical Systems, Inc.—
—PSS World Medical Inc.McKesson Corporation—
—US Endoscopy, Inc.Steris Corp.—
—Futuremed Healthcare Products CorporationCardinal Health Canada Inc.—
—Byrne Medical, Inc.Cantel Medical Corp.—
MultipleLowMedianHighRange appliedImplied per share
EV / LTM Adjusted EBITDA9.6x10.4x13.5x 10.4x–10.8x $8.75–$9.02

Other analyses

AnalysisSummaryImplied per share
Premiums Paid AnalysisAnalyzed 154 selected U.S. medical technology transactions with enterprise values between $20.0 million and $5.0 billion announced since January 1, 2000. Mean premiums: 37.4% (1 day), 40.8% (1 week), 47.2% (1 month), 57.9% (3 months); medians: 31.7%, 33.0%, 35.8%, 47.9%. Merger Consideration implied premiums of 94.4%, 100.9%, 112.0% and 88.3% to closing prices of $7.10 (6/19/14), $6.87 (6/13/14), $6.51 (5/21/14) and $7.33 (3/22/14), respectively.$8.84–$11.58

Fee of approximately $3.3 million, $250,000 payable upon rendering of the opinion and the remainder contingent upon consummation of the Merger; expense reimbursement up to $50,000 plus indemnity. Engagement letter dated April 22, 2014.

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Management projections

Projection yearYear 1Year 2Year 3CAGR
Revenue$314M$323M$333M3.0%
Revenue growth3.0%3.0%3.0%
EBITDA$17.0M$19.1M$21.4M12.2%
EBITDA growth13.3%12.4%12.0%
EBITDA margin5%6%6%
Implied EV / EBITDA12.2x10.8x9.7x

Year-1 growth is against LTM at announcement ($305M revenue, $15.0M EBITDA); later years are year over year.

Canaccord Genuity used internal financial estimates and projections approved by Medical Action management for fiscal years 2015 through 2018 (presented under "Financial Projections of the Company"), together with management-approved calendar year 2014 adjusted EBITDA estimates. The projections were prepared on a stand-alone basis and adjusted pro forma for the June 2, 2014 divestiture of Medegen Medical Products and certain Patient Care business assets for approximately $78.6 million in cash, with roughly $40.0 million of net proceeds used to repay debt. Specific revenue and EBITDA figures were not included in the sliced sections.

Process notes

Single financial advisor (Canaccord Genuity) delivered a fairness opinion to the Medical Action board on June 23, 2014, reaffirmed orally on June 24, 2014, the date of the Merger Agreement. A Special Committee of the board ran the process and evaluated competing proposals from Owens & Minor, Company A and Company B; Owens & Minor was selected in part because it committed to a full reverse termination fee (approximately 1% of deal value) if the deal failed on HSR Act grounds, while Company A offered only a smaller fee and Company B none. All of Canaccord Genuity's valuation analyses produced implied per-share values below the $13.80 merger consideration.

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