Take Money and Run Seen as Best Allscripts Bet: Real M&A

Allscripts Healthcare Solutions Inc.’s best hope for shareholders now lies in private equity after management turmoil and disappointing earnings erased half of the medical-software provider’s market value.

Allscripts has spoken in recent weeks with firms such as Blackstone Group LP about a potential leveraged buyout, people familiar with the matter said last week. The Chicago-based company is courting buyers after the stock traded on Sept. 27 at the lowest multiple to sales and net assets among U.S. application-software providers in health care, according to data compiled by Bloomberg. Even after surging on the Bloomberg News report, the stock is down 40 percent from this year’s peak.

While the $2.2 billion company ousted its chairman and reduced its profit forecast for this year amid struggles to integrate a 2010 acquisition, Allscripts still could draw suitors as the U.S. government offers incentives for health-care providers to digitize records, Maxim Group LLC said. Allscripts also generated more free cash flow per dollar of equity than 91 percent of peers and has less than $500 million in debt. A takeover could fetch $16 a share, a 25 percent premium, according to International Strategy & Investment Group LLC.

“Allscripts has had some internal struggles,” Richard Foran, a fund manager at Pittsburgh-based Symons Capital Management Inc., which oversees about $480 million including Allscripts shares, said in a telephone interview. After the stock decline, “private equity is probably more than willing to buy it for its potential.”

Digital Records

Ariana Nikitas, a spokeswoman for Allscripts, said the company doesn’t discuss speculation, when asked about the status of a sale and if it had held talks with private-equity firms or other buyers.

Allscripts provides software and services to health-care providers for use in creating and maintaining electronic health records, managing documentation and prescribing medications electronically. The company, which sells information systems to doctors’ offices, bought Eclipsys Corp. for $1.3 billion in 2010 to expand into software for hospitals and health-care networks.

Shares of Allscripts, which peaked this year on Feb. 16 at $21.47, had their biggest decline in more than three years on April 27 after the company fired Chairman Phil Pead, the former head of Eclipsys, prompting three board members to resign in protest. The company also cut its full-year profit estimate, saying in a statement that some customers had delayed commitments as they waited for new product releases and looked for it to demonstrate “more robust integration” of products. Allscripts also said its chief financial officer was leaving.

Stumbles, Shortfall

After Allscripts adopted a poison pill in May to thwart unwanted takeovers, shareholder HealthCor Management LP sued the company over its firing of Pead and protested the process for filling the three board seats. HealthCor, a $2 billion asset manager that invests in health and life-sciences companies, later withdrew its lawsuit after Allscripts agreed to nominate three independent directors.

Allscripts “stumbled from an execution standpoint and that has caused the shortfall in the numbers and a recalibration of their guidance, and then you had the board upheaval and the senior management turmoil,” Anthony Vendetti, a New York-based analyst at Maxim Group, said in a phone interview. “All of those factors contributed to the significant share-price decline and has created this opportunity that’s out there.”

Low Valuation

By last week -- when Bloomberg News reported that the company had hired Citigroup Inc. for advice on talks with private-equity buyers, according to people familiar with the matter -- Allscripts’s stock was trading about 50 percent below its February peak.

That left the company valued at 1.37 times its trailing 12-month revenue, the lowest multiple among U.S. application-software providers involved in health-care equipment and services with a market capitalization of more than $100 million, according to data compiled by Bloomberg. It was valued at 1.46 times book value, less than half the median multiple of 3.6 times for the group, the data show.

Even with the company’s recent stumbles, Vendetti said potential buyers may be attracted to Allscripts because of its customer base and its technology, which is in demand as doctors and hospitals seek federal grants for converting to electronic records.

Given Allscripts’s stock slump this year, “it’s one of the more attractive ways to get involved in the industry,” Vendetti said. “They have a very large installed base of both prestigious hospital clients as well as a large installed base of physicians” using their products.

Turnaround Candidate

While integration issues related to the Eclipsys takeover have crimped Allscripts’s ability to win new business, “the potential is definitely there” to turn around the business, Vendetti said.

Private-equity buyers may also be lured by the company’s steady revenue from maintenance fees and its cash flow, said Michael Cherny, a New York-based analyst at ISI.

Cherny said Allscripts could receive $16 to $17 a share in a buyout. That compares with analysts’ consensus 12-month stock-price estimate of $12.55, less than yesterday’s closing level of $12.84.

Today, Allscripts shares rose 1 cent to $12.84 at 10:44 a.m. in New York.

Allscripts’s free-cash-flow yield of 10.8 percent last week was more than three times the industry median of 3.3 percent, according to data compiled by Bloomberg. It has only $489 million in debt, while holding $122 million in cash.

The company is “a solid LBO candidate,” said Steven Soranno, a Bethesda, Maryland-based analyst for Calvert Investment Management Inc., which oversees $12.2 billion, including Allscripts shares.

Industry Suitors

In addition to private equity, Allscripts could attract suitors from within the health-care industry, such as Siemens AG, General Electric Co. or San Francisco-based McKesson Corp., said Sean Wieland, a San Francisco-based analyst at Piper Jaffray Cos.

Representatives for Munich-based Siemens and Fairfield, Connecticut-based GE declined to comment. Representatives for McKesson didn’t respond to phone or e-mail messages seeking comment.

Still, Wieland said any potential buyer would have to be willing to spend time and money integrating Allscripts’s products onto a single platform.

“They have a lot of the right ingredients to make it all work,” Wieland said. “It’s just a big challenge to get them to all work together.”

Allscripts’s operating margin of 4.79 percent last quarter was less than half the median of application-software peers in health care, data compiled by Bloomberg show.

Even so, the company offers a private-equity buyer the opportunity to buoy profits by streamlining expenses, said ISI’s Cherny.

“There’s a significant amount of opportunity for cost cutting,” Cherny said. “That’s what would garner significant interest.”

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