Fairness opinions › Physician Groups › 2016

USMD Holdings acquired by WellMed Medical Management: fairness opinion by Jefferies

Announced August 29, 2016 · One-step merger · All cash · DEFM14C filed September 12, 2016

Physician Groups Primary Care Sponsor: Optum / UnitedHealth Group Incorporated

Enterprise value

$255M

equity $270M

EV / LTM EBITDA

15.5x

EBITDA $16.4M · 5% margin

EV / LTM revenue

0.72x

revenue $354M

DCF discount rate

9.4%–10.4%

Exit multiple

Deal terms

ConsiderationAll cash

Price per share$22.34

Premium—

Premium basis—

StructureOne-step merger

Termination fee$10.0M (3.7% of equity)

Reverse termination fee—

Go-shopNone

Outside date—

FilingDEFM14C · EDGAR index

Implied value per share by method vs. $22.34 offer

Selected companies — EV / CY2016E EBITDA $9.23 – $12.03

Selected companies — EV / CY2017E EBITDA $14.21 – $18.53

Precedent transactions — TV / LTM EBITDA $0.00 – $0.05

Discounted cash flow $17.28 – $20.22

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

Opinion of Jefferies to the special committee

Delivered August 29, 2016 · Fee $8.5M ($8.0M contingent on closing)

Discounted cash flow assumptions

Discount rate9.4%–10.4%

Basisselected range of discount rates; NOL carryforwards discounted at midpoint of cost of equity of 13.5%

Terminal valueExit multiple

Perpetuity growth—

Exit multiple7.0x–8.0x FY2020E adjusted EBITDA

Projection periodQ4 2016E-2020E

Projections usedCompany management Projections (May 2016)

Implied value per share$17.28–$20.22

Present values as of September 30, 2016; net present value of potential net operating loss carryforwards taken into account; stock-based compensation treated as a cash expense.

Selected public companies (4)

AmSurg Corp. · Envision Healthcare Holdings, Inc. · MEDNAX, Inc. · Team Health Holdings, Inc.

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
EV / CY2016E EBITDA	9.6x	10.2x	10.6x	9.3x–11.3x	$9.23–$12.03
EV / CY2017E EBITDA	8.4x	8.9x	9.6x	8.0x–10.0x	$14.21–$18.53

Selected precedent transactions (4)

Date	Target	Acquirer	Multiple
2012-11-05	Metropolitan Health Networks Inc.	Humana Inc.	—
2012-05-21	Healthcare Partners Holdings, LLC	DaVita, Inc.	—
2011-06-27	ContinuCare Corp.	Metropolitan Health Networks Inc.	—
2010-08-16	Prospect Medical Holdings, Inc.	Leonard Green & Partners, L.P.	—

Multiple	Low	Median	High	Range applied	Implied per share
TV / LTM EBITDA	6.2x	8.4x	8.7x	7.5x–9.5x	$0.00–$0.05

Aggregate fee estimated at approximately $8.5 million, of which a portion was payable upon delivery of Jefferies' opinion and approximately $8 million contingent upon consummation of the Merger. Jefferies received a $3 million fee in the prior two years for advising the Company on its lithotripsy division sale.

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Management projections

Projection year	Year 1	Year 2	Year 3	Year 4	CAGR
Revenue	$404M	$454M	$510M	$563M	11.7%
Revenue growth	14.1%	12.5%	12.2%	10.5%
EBITDA	$26.3M	$27.8M	$32.1M	$40.1M	15.1%
EBITDA growth	60.4%	5.7%	15.5%	24.9%
EBITDA margin	7%	6%	6%	7%
Implied EV / EBITDA	9.7x	9.2x	7.9x	6.3x

Year-1 growth is against LTM at announcement ($354M revenue, $16.4M EBITDA); later years are year over year.

Management prepared two sets of forecasts: the July 2015 "Bidder Projections" (FY2015 stub through 2019, assuming the Company obtained significant capital and fully executed its strategic growth plan), made available in the data room to bidders, and the May 2016 "Projections" (FY2016 stub through 2020) prepared bottom-up on a standalone basis incorporating execution risks and materially different from the Bidder Projections. The Projections, used by Jefferies with the Special Committee's approval, show net operating revenue growing from $354.0 million in 2016 to $563.4 million in 2020, EBITDA of $9.2 million (adjusted EBITDA $16.4 million) in 2016 rising to $40.1 million in 2020, and unlevered free cash flows of $8.5 million in 2016 to $24.6 million in 2020.

Process notes

Going-private style cash merger of a Nasdaq-listed physician group by WellMed Medical Management (an Optum/UnitedHealth affiliate), effected by written consent: USMD Physicians Services/Ventures held approximately 76.07% of shares and delivered the Requisite Common Stockholder Approval on August 29, 2016, so the DEFM14C is an information statement with no stockholder vote. A Special Committee retained Jefferies, which delivered the sole fairness opinion to the Special Committee and the Board on August 29, 2016. Notably, the selected precedent transactions analysis implied an equity value range of only $0.00-$0.05 per share, and both selected public companies ranges were below the $22.34 merger consideration; only the DCF ($17.28-$20.22) approached it, all below the deal price. Termination fee of $10 million (approximately 3.7% of equity value) or $2.686 million depending on termination circumstances; most termination-fee triggers lapsed upon delivery of the Written Consent.

Other Physician Groups fairness opinions

Network Medical Management / Apollo Medical Holdings 2016 · 9.5x EV/EBITDA
Team Health Holdings / Blackstone 2016 · 11.5x EV/EBITDA
Envision Healthcare Holdings / AmSurg 2016 · 11.2x EV/EBITDA
ExamWorks Group / Leonard Green & Partners 2016 · 11.5x EV/EBITDA
IPC Healthcare / TeamHealth 2015 · 22.5x EV/EBITDA
Envision Healthcare Holdings / KKR 2018 · 10.0x EV/EBITDA

All Physician Groups opinions → · Jefferies opinions