Moving on is the best revenge for surgical-center operator AmSurg.
The $4.4 billion company is reportedly in talks to merge with Envision Healthcare, a provider of physician services that's both bigger and arguably better than AmSurg's last beau, Team Health. AmSurg made two cash-and-stock offers for Team Health last year, both of which were rejected as too low. The latest proposal valued Team Health at $69.32 a share; it's now trading at about $45 after plunging as much as 7.7 percent on news of AmSurg's alternative deal.
Team Health investors had been optimistic a merger could still happen, particularly after activist investor Jana Partners took a stake in Team Health and criticized "missteps" it had made in strategy, governance and capital allocation. Team Health agreed in March to give Jana three board seats in exchange for a standstill agreement. But a scorned lover isn't always willing to offer a second chance, particularly when it has other prospects.
Envision is on track for about $740 million in Ebitda this year, compared with about $511 million for Team Health. That extra profit matters in a rapidly consolidating healthcare industry, where size boosts negotiating power with customers and suppliers. For these companies, the ability to offer more and more-diverse services to hospitals is key, in light of efforts by Medicare and other payers to incentivize providers to better coordinate services and package all patient charges into one bill.
AmSurg's CEO Christopher Holden said Wednesday he believes consolidation is inevitable and that someone will try to build a physician-outsourcing "super group." Turns out, that someone might be him. A combined AmSurg and Envision would be the clear leader in outsourced health-care services, with expertise in medical transportation, ambulatory surgery centers, anesthesiology and emergency care. It's the same logic as a Team Health deal, but presumably this time with a more willing partner.
It's not totally clear yet how a deal would be structured. But if AmSurg is the one buying Envision, then it's going to be getting the company's bigger profit base at a cheaper valuation than what it would likely pay for Team Health. Envision's enterprise value as of Wednesday was roughly 13 times the past year's Ebitda, versus a 22 times multiple at Team Health. AmSurg could afford to pay up to $36.57 a share for Envision (a 43 percent premium to the unaffected stock price) if it can find synergies equal to 3 percent of the combined companies' revenues, according to estimates from RBC analyst Frank Morgan. Something in the range of $32 a share is probably more reasonable.
It's not all bad news for Team Health, which struck a deal of its own with a $1.6 billion acquisition of IPC Healthcare last year. That deal was pricey, required Team Health to roughly double its reported leverage and ran into some integration issues. But it was generally considered to be at least strategically smart in the long term. The revenue and cost synergies promised for that deal could start to materialize later this year.
Based on Jana's reported average cost basis, the activist investor is still in the green and could stand to make even more money as Team Health starts to capitalize on the IPC deal. Without a juicy takeover premium, though, the victory won't be quite as sweet.
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