Fairness opinions › Hospitals › 2013

Vanguard Health Systems acquired by Tenet Healthcare: fairness opinion by J.P. Morgan

Announced June 24, 2013 · One-step merger · All cash · DEFM14C filed July 26, 2013

Hospitals Hospital: General Acute Care

Enterprise value

$4.3B

EV / LTM EBITDA

8.1x

EBITDA $531M · 9% margin

EV / LTM revenue

0.71x

revenue $6.0B

DCF discount rate

7.5%–8.0%

Perpetuity growth

Deal terms

ConsiderationAll cash

Price per share$21.00

Premium—

Premium basis—

StructureOne-step merger

Termination fee$61.0M

Reverse termination fee—

Go-shop30 days

Outside date—

FilingDEFM14C · EDGAR index

Implied value per share by method vs. $21.00 offer

Selected companies — EV / EBITDA for twelve months ended June 30, 2014 (2014E EV/EBITDA) $12.30 – $18.95

Selected companies — P / E for twelve months ended June 30, 2014 (2014E cash EPS) $9.45 – $12.60

Precedent transactions — EV / LTM EBITDA (Transaction Multiple) $13.70 – $26.35

Discounted cash flow $16.50 – $24.60

52-week trading range $7.97 – $17.45

Analyst price targets $13.00 – $18.50

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 June 21, 2013 · Fee $25.0M ($21.0M contingent on closing)

Discounted cash flow assumptions

Discount rate7.5%–8.0%

BasisWACC of the Company, including an analysis of the selected public companies

Terminal valuePerpetuity growth

Perpetuity growth0.5%–1.5%

Exit multiple—

Projection periodFY2014-FY2023

Projections usedCompany management projections (unlevered free cash flows for fiscal years 2014 through 2023)

Implied value per share$16.50–$24.60

Management estimated a 1.0% terminal value growth rate; range of 0.5%-1.5% applied to final-year unlevered free cash flow

Selected public companies (5)

HCA Holdings, Inc. (HCA) · Tenet Healthcare Corporation (Buyer) (THC) · Community Health Systems, Inc. (CYH) · Health Management Associates Inc. (HMA) · LifePoint Hospitals, Inc. (LPNT)

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
EV / 2013E EBITDA	7.0x	—	18.5x	—	—
EV / EBITDA for twelve months ended June 30, 2014 (2014E EV/EBITDA)	6.5x	7.0x	7.2x	6.5x–7.5x	$12.30–$18.95
P / E for twelve months ended June 30, 2014 (2014E cash EPS)	11.0x	11.7x	15.1x	12.0x–16.0x	$9.45–$12.60

Selected precedent transactions (7)

Date	Target	Acquirer	Multiple
2000	Quorum Health Resources	Triad Health Systems, Inc.	7.9x EV / LTM EBITDA
2004	IASIS Healthcare Corporation	Texas Pacific Group	8.6x EV / LTM EBITDA
2004	Vanguard Health Systems, Inc.	The Blackstone Group L.P.	9.0x EV / LTM EBITDA
2006	HCA	K.K.R. & Co. L.P., Bain Capital, LLC and Merrill Lynch	7.7x EV / LTM EBITDA
2007	Triad Health Systems, Inc.	Community Health Systems, Inc.	9.8x EV / LTM EBITDA
2011	HealthONE LLC	HCA	6.0x EV / NTM EBITDA
2011	Tenet Healthcare Corporation (Buyer) - final offer in proposed acquisition	Community Health Systems, Inc.	6.7x EV / LTM EBITDA

Multiple	Low	Median	High	Range applied	Implied per share
EV / LTM EBITDA (Transaction Multiple)	6.0x	—	9.8x	7.0x–9.0x	$13.70–$26.35

Other analyses

Analysis	Summary	Implied per share
52-week trading range	52-week trading range of Company Common Stock ending June 20, 2013	$7.97–$17.45
Analyst price targets	Price targets set by twelve published equity research analysts covering the Company	$13.00–$18.50

Company agreed to pay J.P. Morgan $25 million, $21 million of which payable only if the Merger or similar transaction is consummated; plus expense reimbursement and indemnity. J.P. Morgan received ~$6.3 million from the Company and ~$286.2 million from Blackstone and its affiliates/portfolio companies in the prior two years; no material relationships with Buyer.

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Management projections

Projection year	Year 1	Year 2	Year 3	Year 4	CAGR
Revenue	$6.1B	$6.5B	$6.9B	$7.2B	6.0%
Revenue growth	0.7%	6.9%	5.9%	5.3%
EBITDA	$556M	$626M	$689M	$757M	10.8%
EBITDA growth	4.7%	12.6%	10.1%	9.9%
EBITDA margin	9%	10%	10%	10%
Implied EV / EBITDA	7.7x	6.9x	6.2x	5.7x

Year-1 growth is against LTM at announcement ($6.0B revenue, $531M EBITDA); later years are year over year.

Company management prepared projections (the "Projections") based on May 19, 2013 information, updated for assumed disproportionate share hospital cuts ($18.75 million reduction to FY2014 EBITDA and $25 million reductions in each of FY2015E-FY2017E EBITDA). Fiscal years ending June 30 show revenue of $6,036 million in FY2013E rising to $7,247 million in FY2017E, EBITDA of $557 million in FY2013E rising to $757 million in FY2017E, and net income of $48 million to $149 million; free cash flow moves from $(48) million in FY2013E to $365 million in FY2017E. J.P. Morgan's DCF used management-provided unlevered free cash flows for fiscal years 2014 through 2023.

Process notes

DEFM14C information statement — no stockholder vote sought because Majority Stockholders (Blackstone funds, Morgan Stanley Capital Partners funds, and executives Martin, Pitts, Roe and Spalding) holding ~54.7% of shares delivered a written consent on June 24, 2013. Merger agreement included a post-signing "fiduciary out" window running until 11:59 p.m. New York time on July 24, 2013 (approximately 30 days) during which the Board could entertain and accept a superior proposal upon payment of the $61 million termination fee. J.P. Morgan was the sole financial advisor and rendered oral and written opinions on June 21, 2013 based on Buyer's final $21.00 price (up from an earlier $20.00 offer). Buyer estimated total funds needed of approximately $4.6 billion including refinancing Company debt.

Other Hospitals fairness opinions

Health Management Associates / Community Health Systems 2013 · 9.1x EV/EBITDA
Kindred Healthcare / Humana/TPG/WCAS 2017 · 8.0x EV/EBITDA
LifePoint Health / Apollo Global Management 2018 · 7.5x EV/EBITDA
Select Medical / WCAS, et. al. 2026 · 8.0x EV/EBITDA

All Hospitals opinions → · J.P. Morgan opinions