Leonard Green May Get a Bargain

A sign private equity may have an easier time putting dry powder to work.

ExamWorks -- which verifies illnesses and reviews medical bills for insurance companies, government agencies and legal firms -- should prepare for a little examination of its own.

On Wednesday, ExamWorks said it had agreed to be acquired by private equity firm Leonard Green & Partners for a mere 4 percent premium to its closing price Tuesday, or $35.05 a share. But there's a catch -- a go-shop provision that allows the company to seek out other buyers through June 1.

Shareholders appear to be banking on the idea that another bidder will emerge -- ExamWorks soared as high as $36.34, its highest level in more than eight months. Its bump was also helped by short-sellers racing to cover their combined positions, which in recent months rose beyond 14 percent of the company's free float, according to data compiled by Markit and Bloomberg. 

Caught Short

ExamWorks' short sellers will be ruing Leonard Green's buyout offer for the company

Source: Markit, Bloomberg

One potential buyer is Change Healthcare, according to Sachin Shah, a merger arbitrage strategist at Albert Fried & Co. Change Healthcare, formerly known as Emdeon, is backed by Blackstone Group and provides services such as managing patient-care information and claims. But Change Healthcare, like all suitors -- including deal-starved private equity firms -- will be working against the clock to complete the due diligence needed to secure financing ahead of lobbing bids.

And although other suitors may be enthused by the laundry list of industry growth drivers in ExamWorks' annual report (such as increased demand for services due to the prevalence of fraud), any bids may not be dramatically higher. That's because Leonard Green's deal already values the company at roughly 13.4 times its estimated 2016 Ebitda. 

Still, ExamWorks is a textbook example of a company operating in a fragmented industry that has grown by snapping up smaller rivals -- a grand total of 57 since it was founded in 2007. Roll-up strategies have long been favored by private equity firms, and Leonard Green likely believes there is a long runway for ExamWorks to maintain its pace of purchases under new ownership. 

Buying Spree

ExamWorks has made 57 bolt-on acquisitions since its inception, known by many as a "roll-up" strategy

Source: Company filings

ExamWorks' willingness to accept Leonard Green's offer of $35.05 (representing a 20 percent discount to the stock's 12-month high) signals that private equity firms have a better-than-expected shot at deploying their record levels of dry powder if board expectations have truly softened and directors aren't reminiscing about where the stock traded a year ago when negotiating deals today.

This was also seen in Apollo Global Management's buyout of gourmet grocer The Fresh Market, which the private equity firm snagged at $28.50 a share, a 31 percent discount to its 12-month high at announcement. 

Beatable Offer?

ExamWorks' share price exceeds Leonard Green's $35.05 takeover price, which itself is well below the company's 12-month high.

Source: Bloomberg

Even if boards haven't entirely reset their attitude toward benchmark takeover prices, private equity firms have little to lose by starting more conversations.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Gillian Tan in New York at gtan129@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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