Fairness opinions › Specialty Outpatient Facilities › 2017

Surgical Care Affiliates acquired by Optum: fairness opinion by J.P. Morgan

Announced January 9, 2017 · Tender offer · Cash and stock · SC 14D9 filed February 21, 2017

Specialty Outpatient Facilities ASC

Enterprise value

$3.3B

EV / LTM EBITDA

16.4x

EBITDA $201M · 17% margin

EV / LTM revenue

2.75x

revenue $1.2B

DCF discount rate

6.5%–7.5%

Perpetuity growth

Deal terms

ConsiderationCash and stock

Price per share$57.00

Premium29.4%

Premium basis60-day volume weighted average price as of December 16, 2016 (per UnitedHealth Group's December 17, 2016 proposal at $57.00 per Share)

StructureTender offer

Termination fee$90.0M (3.7% of equity)

Reverse termination fee—

Go-shopNone

Outside date—

FilingSC 14D9 · EDGAR index

Exchange offer for $57.00 per Share in value, payable in shares of UnitedHealth Group common stock, with UnitedHealth Group having the ability to elect, up until three days prior to closing, to pay up to 30% of the purchase price in cash.

Implied value per share by method vs. $57.00 offer

Selected companies — FV / CY2017E EBITDA $26.25 – $33.25

Selected companies — FV / CY2017E EBITDA (expanded reference range) $26.25 – $51.00

Precedent transactions — FV / LTM EBITDA (applied to CY2016 EBITDA) $11.50 – $35.25

Discounted cash flow $40.00 – $70.50

Historical Trading Range for the Company (52-week) $38.29 – $52.01

Analyst Price Targets for the Company $37.00 – $58.00

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 January 7, 2017 · Fee $14.0M ($12.0M contingent on closing), $2.0M on delivery of the opinion

Discounted cash flow assumptions

Discount rate6.5%–7.5%

Basisweighted average cost of capital of the Company

Terminal valuePerpetuity growth

Perpetuity growth1.5%–2.0%

Exit multiple—

Projection period2017E-2031E

Projections usedCompany management unaudited prospective financial information and Unlevered Free Cash Flow Estimates, including extrapolations derived by J.P. Morgan reviewed and approved by management

Implied value per share$40.00–$70.50

Discounted to present value as of December 31, 2016; adjusted by subtracting projected net debt as of December 31, 2016 and adding discounted value of cash flows from potential tax savings from utilization of the Company's net operating losses.

Selected public companies (4)

Surgery Partners, Inc. · Envision Healthcare Holdings, Inc. · TeamHealth Holdings Inc. · MEDNAX, Inc.

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
FV / CY2017E EBITDA	9.3x	—	10.7x	9.5x–10.8x	$26.25–$33.25
FV / CY2017E EBITDA (expanded reference range)	9.3x	—	10.7x	9.5x–14.0x	$26.25–$51.00

Selected precedent transactions (9)

Date	Target	Acquirer	Multiple
2016-10	TeamHealth Holdings Inc.	Blackstone Group LP	12.9x FV / LTM EBITDA
2016-06	Envision Healthcare Holdings, Inc.	AMSURG Corp.	12.6x FV / LTM EBITDA
2015-08	IPC Healthcare, Inc.	TeamHealth Holdings Inc.	22.7x FV / LTM EBITDA (for reference only, not a component of fairness analysis)
2014-05	Sheridan Healthcare, Inc.	AMSURG Corp.	12.2x FV / LTM EBITDA
2014-06	Symbion Holdings Corp.	Surgery Partners Inc. / H.I.G. Capital, LLC	10.3x FV / LTM EBITDA
2011-04	National Surgical Care, Inc.	AMSURG Corp.	8.1x FV / LTM EBITDA
2011-01	NovaMed, Inc.	Surgery Partners Inc. / H.I.G. Capital, LLC	7.7x FV / LTM EBITDA
2007-04	Symbion Holdings Corp.	Crestview Partners, L.P.	12.5x FV / LTM EBITDA
2007-03	HealthSouth Corporation (Surgery Centers)	TPG Capital, L.P.	10.1x FV / LTM EBITDA

Multiple	Low	Median	High	Range applied	Implied per share
FV / LTM EBITDA (applied to CY2016 EBITDA)	7.7x	—	22.7x	8.0x–13.0x	$11.50–$35.25

Other analyses

Analysis	Summary	Implied per share
Historical Trading Range for the Company (52-week)	For reference purposes only; low and high closing prices during the 52-week period prior to January 5, 2017.	$38.29–$52.01
Analyst Price Targets for the Company	For reference purposes only; publicly available equity research analyst share price targets from FactSet Research Systems.	$37.00–$58.00

$14 million total fee for financial advisory services including delivery of the opinion; $2 million payable upon delivery of the opinion, remainder due upon closing. Prior two years: aggregate fees of approximately $6 million from the Company, $49 million from UnitedHealth Group and $183 million from TPG. Oral opinion rendered January 6, 2017, confirmed in writing January 7, 2017.

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Management projections

Projection year	Year 1	Year 2	Year 3	Year 4	Year 5	CAGR
Revenue	$1.4B	$1.7B	$1.9B	$2.2B	$2.6B	16.3%
Revenue growth	17.3%	19.1%	15.7%	14.7%	15.6%
EBITDA	$235M	$282M	$332M	$386M	$447M	17.4%
EBITDA growth	16.9%	20.0%	17.7%	16.3%	15.8%
EBITDA margin	17%	17%	17%	17%	17%
Implied EV / EBITDA	14.0x	11.7x	9.9x	8.5x	7.4x

Year-1 growth is against LTM at announcement ($1.2B revenue, $201M EBITDA); later years are year over year.

J.P. Morgan relied on internal financial analyses and forecasts prepared by Company management (Table 1 of the Schedule 14D-9's "Certain Unaudited Prospective Financial Information"), plus extrapolations derived by J.P. Morgan that were reviewed and approved by management. Unlevered Free Cash Flow Estimates covered calendar years 2017 through 2031 (Table 2), and EBITDA was defined before stock-based compensation and excluding income attributable to non-controlling interests. Specific revenue/EBITDA dollar figures were not shown in the sliced sections, though the filing notes the Company's implied FV/2017E EBITDA multiple was 13.30x on management projections versus 14.00x on analyst consensus.

Process notes

Stock-for-stock exchange offer (with up to 30% cash election) by UnitedHealth Group/Optum; single fairness opinion from J.P. Morgan to the Surgical Care Affiliates board. TPG Stockholders (approximately 30% of outstanding Shares) signed a Tender and Support Agreement on January 7, 2017. Termination fee of $90 million (~3.7% of equity value) was negotiated down from UnitedHealth Group's initial proposal of 3.5% of enterprise value (~5.0% of equity value); the Company initially proposed 3% of equity value (~$75 million). The Board did not contact other potential counterparties; the merger agreement permits response to unsolicited superior proposals subject to a five-business-day match right. J.P. Morgan disclosed substantial prior relationships with the Company, UnitedHealth Group and TPG.

Other Specialty Outpatient Facilities fairness opinions

Alliance Healthcare Services / Tahoe Investment Group Co. 2017 · 5.7x EV/EBITDA
AmSurg / Envision Healthcare Holdings 2016 · 12.0x EV/EBITDA
NovaMed / Surgery Partners 2011 · 7.8x EV/EBITDA
HealthTronics / Endo Health Solutions 2010 · 8.7x EV/EBITDA
Dialysis Corporation of America / U.S. Renal Care 2010 · 14.1x EV/EBITDA
FONAR / Damadian family Acquisition Group 2025 · 4.3x EV/EBITDA

All Specialty Outpatient Facilities opinions → · J.P. Morgan opinions