Fairness opinions › Physician Groups › 2012

Metropolitan Health Networks acquired by Humana: fairness opinion by Barclays

Announced November 5, 2012 · One-step merger · All cash · DEFM14A filed November 26, 2012
Physician Groups Primary Care
Enterprise value
$851M
EV / LTM EBITDA
8.2x
EBITDA $104M · 13% margin
EV / LTM revenue
1.09x
revenue $780M
DCF discount rate
10.5%–12.0%
Exit multiple

Deal terms

ConsiderationAll cash
Price per share$11.25
Premium—
Premium basis—
StructureOne-step merger
Termination fee$16.0M (3.0% of equity)
Reverse termination fee—
Go-shopNone
Outside dateApril 30, 2013
FilingDEFM14A · EDGAR index

Implied value per share by method vs. $11.25 offer

Selected companies — P / 2012E EPS $6.56 – $10.35
Selected companies — EV / 2012E Adjusted EBITDA $7.68 – $11.92
Precedent transactions — Purchase Price / LTM Adjusted EBITDA (with adjustments) $9.53 – $11.84
Discounted cash flow $10.79 – $13.78
Historical Share Price Analysis $6.12 – $11.03
Research Price Targets Analysis $10.00 – $13.00
Discounted Cash Flow Analysis (with Premium Tax) $9.66 – $12.43

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

Opinion of Barclays to the target board

Delivered November 3, 2012 · Fee $8.4M ($6.2M contingent on closing), $2.3M on delivery of the opinion

Discounted cash flow assumptions

Discount rate10.5%–12.0%
BasisAfter-tax discount rates based on analysis of the weighted average cost of capital of Metropolitan and comparable companies
Terminal valueExit multiple
Perpetuity growth—
Exit multiple5.5x–6.5x NTM (2018) Adjusted EBITDA
Projection period2013P-2017P
Projections usedMetropolitan management projections
Implied value per share$10.79–$13.78

Terminal value as of 2018 using 5.5x-6.5x 2018E Adjusted EBITDA. A second DCF assuming a Premium Tax (2% tax on risk premiums of managed care companies starting 2014, with 1% passed through to Metropolitan, no MER offset) implied $9.66-$12.43 per share.

Selected public companies (8)

UnitedHealth Group Incorporated · WellPoint Inc. · Aetna Inc. · Health Net, Inc. · Cigna Corp · Triple-S Management Corporation · Humana Inc. · Universal American Corp.

MultiplePeer lowPeer medianPeer highRange appliedImplied per share
P / 2012E EPS9.4x—14.7x 9.5x–15.0x $6.56–$10.35
EV / 2012E Adjusted EBITDA6.0x—8.0x 6.0x–8.0x $7.68–$11.92
P / 2013E EPS9.2x—12.8x — —
EV / 2013E Adjusted EBITDA5.7x—6.4x — —

Selected precedent transactions (3)

DateTargetAcquirerMultiple
2012-05-21HealthCare PartnersDaVita Inc.6.9x Purchase Price / LTM Adjusted EBITDA (with adjustments)
2012-05-21HealthCare Partners with Earn-OutsDaVita Inc.7.3x Purchase Price / LTM Adjusted EBITDA (with adjustments)
2011-06-27Continucare CorporationMetropolitan8.0x Purchase Price / LTM Adjusted EBITDA (with adjustments)
MultipleLowMedianHighRange appliedImplied per share
Purchase Price / LTM Adjusted EBITDA (with adjustments)6.9x7.3x8.0x 6.9x–8.0x $9.53–$11.84
Purchase Price / LTM Adjusted EBITDA (without adjustments)8.0x8.0x8.5x — —

Other analyses

AnalysisSummaryImplied per share
Historical Share Price AnalysisReviewed trading prices from June 27, 2011 to November 1, 2012; 52-week closing price range of $6.12 to $11.03; 20-day average price prior to November 1, 2012 of $10.30 and 200-day average of $8.83.$6.12–$11.03
Research Price Targets AnalysisPublicly available independent research analyst per share price targets for Metropolitan common stock ranged from $10.00 to $13.00.$10.00–$13.00
Discounted Cash Flow Analysis (with Premium Tax)DCF adjusting 2014-2017 unlevered free cash flows for an assumed Premium Tax pass-through of 1% with no MER offset.$9.66–$12.43

Approximately $8.45 million total; $2.25 million became due and payable upon delivery of the opinion on November 3, 2012, remainder contingent on consummation. Expense reimbursement and indemnification also provided.

3,000+ healthcare deal-level valuation multiples
The Valuation database includes financial details for more than 3,000 healthcare M&A transactions, private and public, with deal-level multiples, categorized by segment, type, and year.
See the Valuation database →

Management projections

Projection yearYear 1Year 2Year 3Year 4Year 5CAGR
Revenue$816M$866M$1.0B$1.1B$1.2B9.1%
Revenue growth4.6%6.1%17.6%6.8%6.5%
EBITDA$110M$118M$128M$141M$155M9.0%
EBITDA growth5.8%7.3%8.5%10.2%9.9%
EBITDA margin13%14%13%13%13%
Implied EV / EBITDA7.7x7.2x6.6x6.0x5.5x

Year-1 growth is against LTM at announcement ($780M revenue, $104M EBITDA); later years are year over year.

Management prepared non-public Projections for calendar years 2012 through 2017 assuming no change in existing contract terms and no acquisitions. Total revenue grows from $780 million in 2012P to $1,158 million in 2017P (8.2% CAGR), with Adjusted EBITDA rising from $104 million to $155 million, net income from $32 million to $80 million, and diluted EPS from $0.69 to $1.52. Unlevered free cash flow was projected at $59 million in 2013P rising to $90 million in 2017P for use in Barclays' DCF; projections excluded the impact of sequestration and the health insurer premium tax.

Process notes

Barclays was Metropolitan's financial advisor; MJTA also participated in negotiations as an independent financial advisor for Metropolitan but did not deliver a fairness opinion described in the filing. BofA Merrill Lynch advised Humana. Barclays disclosed that an affiliate serves as a lender under Humana's $1 billion revolving credit facility. Humana was also Metropolitan's largest customer (82.8% of revenue in Q3 2012). Deal was initially negotiated as a possible two-step tender offer/merger but the proxy reflects a one-step merger with a shareholder vote.

Other Physician Groups fairness opinions

All Physician Groups opinions → · Barclays opinions