Nighthawk Radiology Holdings acquired by Virtual Radiologic: fairness opinion by Morgan Stanley
Announced September 27, 2010 · One-step merger · All cash ·
DEFM14A filed November 23, 2010
Enterprise value
$207M
EV / LTM EBITDA
12.9x
EBITDA $16.0M · 13% margin
EV / LTM revenue
1.63x
revenue $127M
DCF discount rate
9.0%–10.5%
Perpetuity growth
Deal terms
ConsiderationAll cash
Price per share$6.50
Premium100.0%
Premium basisclosing price of $3.25 on September 24, 2010 (last full trading day prior to announcement)
StructureOne-step merger
Termination fee$6.6M
Reverse termination fee—
Go-shop30 days · $3.7M reduced fee
Outside date—
FilingDEFM14A · EDGAR index
Implied value per share by method vs. $6.50 offer
Selected companies — AV / 2011E EBITDA - vRad (on May 14, 2010) $3.23
Selected companies — AV / 2011E EBITDA - Department Outsourcing $4.61 – $5.57
Selected companies — AV / 2011E EBITDA - Healthcare Staffing $3.85 – $6.33
Selected companies — Price / 2011E Adjusted EPS - vRad (on May 14, 2010) $4.90
Selected companies — Price / 2011E Adjusted EPS - Department Outsourcing $3.63 – $4.96
Selected companies — Price / 2011E Adjusted EPS - Healthcare Staffing $5.65 – $8.24
Precedent transactions — AV / 2011E EBITDA $4.81
Discounted cash flow $4.03 – $5.45
Historical Share Price Performance (trading range) $2.25 – $4.60
Securities Research Analysts' Future Price Targets $3.11 – $3.56
Present Value of Future Stock Price Analysis $2.83 – $3.79
Premiums Paid Analysis $4.23 – $4.88
Leveraged Buyout Analysis $3.12 – $4.10
Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.
Opinion of Morgan Stanley to the target board
Delivered September 26, 2010 · Fee $3.0M ($3.0M contingent on closing)
Discounted cash flow assumptions
Discount rate9.0%–10.5%
BasisWACC (cost of equity via CAPM; after-tax cost of debt using borrowing rates of comparable companies)
Terminal valuePerpetuity growth
Perpetuity growth2.0%–3.0%
Exit multiple—
Projection period2011E-2015E
Projections usedCompany management forecasts
Implied value per share$4.03–$5.45
Discounted back to December 31, 2010; terminal value by growing 2015 unlevered free cash flow.
Selected public companies (7)
Virtual Radiologic Corporation (vRad) · MEDNAX, Inc. · Emergency Medical Services L.P. · Team Health, Inc. · IPC The Hospitalist Company, Inc. · AMN Healthcare Services, Inc. · Cross Country Healthcare, Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| AV / 2011E EBITDA - vRad (on May 14, 2010) | — | — | — | 4.9x | $3.23 |
| AV / 2011E EBITDA - Department Outsourcing | — | — | — | 6.9x–8.3x | $4.61–$5.57 |
| AV / 2011E EBITDA - Healthcare Staffing | — | — | — | 5.8x–9.4x | $3.85–$6.33 |
| Price / 2011E Adjusted EPS - vRad (on May 14, 2010) | — | — | — | 15.5x | $4.90 |
| Price / 2011E Adjusted EPS - Department Outsourcing | — | — | — | 11.5x–15.7x | $3.63–$4.96 |
| Price / 2011E Adjusted EPS - Healthcare Staffing | — | — | — | 17.9x–26.1x | $5.65–$8.24 |
Selected precedent transactions (1)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2010-05-14 | Virtual Radiologic | Providence | 7.2x AV / 2011E EBITDA |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| AV / 2011E EBITDA | 7.2x | 7.2x | 7.2x | 7.2x | $4.81 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Historical Share Price Performance (trading range) | Closing price ranges for periods ending September 24, 2010: last 30 trading days $2.71-$3.25 (avg $2.93); last 90 trading days $2.25-$3.25 (avg $2.80); since January 1, 2010 $2.25-$4.60 (avg $3.26). Current price $3.25. Implied premiums of $6.50: 100% to close, 122% to 30-day average, 132% to 90-day average. | $2.25–$4.60 |
| Securities Research Analysts' Future Price Targets | Analyst price targets ranged $3.50-$4.00, discounted at a 12.5% cost of equity to present values of $3.11-$3.56 per share. | $3.11–$3.56 |
| Present Value of Future Stock Price Analysis | Applied AV/NTM EBITDA multiples of 5.2x (Company current) and 7.6x (median Department Outsourcing) to 2015E EBITDA per management forecasts; future share price discounted to June 30, 2010 at cost of equity of 11%-14% (midpoint 12.5%). | $2.83–$3.79 |
| Premiums Paid Analysis | Premiums paid in all-cash acquisitions of U.S. public companies with market caps under $1 billion over prior 20 years were 30%-50% of pre-announcement price, implying $4.23-$4.88 per share. vRad was acquired by Providence at a 33% premium, implying $4.32 per share for NightHawk. | $4.23–$4.88 |
| Leveraged Buyout Analysis | Assumed leverage of 4.0x-5.0x, 9% weighted-average interest rate, exit multiple of 6.0x-7.0x 2015E EBITDA and required IRR of 15%-25%, using management forecasts. | $3.12–$4.10 |
Fees of $3 million for financial advisory services and the opinion, all contingent upon consummation of the merger; expense reimbursement and indemnification not contingent on closing.
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Management projections
| Projection year | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | CAGR |
|---|---|---|---|---|---|---|
| Revenue | $124M | $125M | $133M | $145M | $157M | 6.1% |
| Revenue growth | -2.4% | 0.8% | 6.4% | 9.0% | 8.3% | |
| EBITDA | $18.0M | $19.0M | $18.0M | $18.0M | $19.0M | 1.4% |
| EBITDA growth | 12.5% | 5.6% | -5.3% | 0.0% | 5.6% | |
| EBITDA margin | 15% | 15% | 14% | 12% | 12% | |
| Implied EV / EBITDA | 11.5x | 10.9x | 11.5x | 11.5x | 10.9x |
Year-1 growth is against LTM at announcement ($127M revenue, $16.0M EBITDA); later years are year over year.
NightHawk does not ordinarily publish projections beyond quarterly guidance, but management prepared non-public financial projections for fiscal years 2011 through 2015 that were provided to vRad, the Board and Morgan Stanley. Morgan Stanley used management's estimated calendar 2011 EBITDA of $17.6 million and estimated 2011 adjusted EPS of $0.32 (excluding stock-based compensation, amortization, certain non-recurring items and incurred but not reserved accruals), plus 2015E EBITDA for terminal value and LBO exit analyses.
Process notes
Single fairness opinion from Morgan Stanley to the NightHawk Board. Deal included a 30-day go-shop period (ended October 26, 2010) with a reduced $3.7 million termination fee (versus $6.6 million) for terminations during the go-shop or within 25 additional days with an excluded party; no excluded party was identified. Expense reimbursement of up to $2.4 million, creditable against the termination fee. Morgan Stanley was not authorized to solicit other parties prior to signing. vRad had itself recently been acquired by Providence Equity Partners (announced May 14, 2010), and Morgan Stanley disclosed prior advisory/financing relationships with Providence affiliates. Price was negotiated up from an earlier $7.00 per share indication before a capitalization adjustment/revised offer resulted in $6.50 per share.
Other Physician Groups fairness opinions
- Virtual Radiologic / Providence Equity Partners 2010 · 9.5x EV/EBITDA
- Continucare / Metropolitan Health Networks 2011 · 9.2x EV/EBITDA
- Emergency Medical Services / Clayton, Dubilier & Rice 2011 · 10.2x EV/EBITDA
- Metropolitan Health Networks / Humana 2012 · 8.2x EV/EBITDA
- IPC Healthcare / TeamHealth 2015 · 22.5x EV/EBITDA
- Network Medical Management / Apollo Medical Holdings 2016 · 9.5x EV/EBITDA