Oh sorry, did you want a premium with that?
When news broke last week about a possible merger of AmSurg and Envision Healthcare, investors were betting that the deal between the two big U.S. hospital-services providers would be arranged as a typical takeover, with at least some sort of stock price bump for Envision. That sent Envision's shares surging more than 8 percent to their highest levels of the year.
Well, things didn't turn out that way. The deal terms released late Wednesday are for a merger-of-equals, whereby AmSurg is putting up stock but Envision will own the majority of the combined company. The exchange ratio implies a price for Envision of just under $26 a share (about $7.6 billion including debt). That's within a few decimal points of where Envision was trading before the stock took off on the deal-talk news -- in other words, no bump. And so needless to say, much of those speculative gains were erased as soon as markets opened on Thursday morning.
You can't blame investors for being optimistic. They certainly weren't the only ones. Analysts were projecting that Envision would climb to about $31 a share on its own as the company moved past operational missteps that had felled its stock last year. Many of them thought the company would get at least that amount, if not a few dollars more, in a deal with AmSurg. Wells Fargo and RBC were also factoring in at least some kind of cash payout.
Instead, shareholders are stuck with a price below Envision's 52-week average. They'll have a chance to vote on the deal, and may yet hold out for more money. But while the lack of a premium stings a bit now, there is a lot to like about this transaction and reason to think investors will eventually be rewarded.
Combining AmSurg and Envision will create a sort of "super group" of physician-outsourcing providers with the ability to better coordinate care (and patients' bills) across multiple service lines, from medical transportation to anesthesia to emergency room care and ambulatory surgery centers. There's a first-mover advantage to this that should help AmSurg and Envision negotiate contracts with hospitals and payers as they push to cut costs and streamline the medical process.
What this boils down to is that a merged AmSurg-Envision will be a much stronger company that's in a better position to increase profit over time -- and eventually create more value for shareholders than either could have obtained on their own. This is the kind of thing that companies doing a no-premium merger of equals always say, but in a health-care industry that's increasingly obsessed with scale, AmSurg and Envision have a point here.
The deal is expected to be accretive to both companies in fiscal 2017 and increase their earnings per share by double digits in 2018. RBC is estimating a 3.5 percent boost to AmSurg's stand-alone earnings per share in 2017 and a 13 percent lift in 2018 -- and that means something at a time when plenty of mega-deals will take years to yield significant benefits.
Because of the all-stock structure, the surviving company will also have a much cleaner balance sheet with which to seek out even more acquisitions. Combined, AmSurg and Envision will have a net debt to Ebitda ratio of 4.2 -- below the 5.5 times that AmSurg chief financial officer Claire Gulmi has previously suggested the company would be comfortable with.
Be patient, Envision shareholders, your payoff is coming.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Unlike some other recent all-stock, zero-premium transactions in the health-care space -- IMS Health-Quintiles comes to mind -- AmSurg and Envision didn't specify that they'd won backing from key shareholders ahead of time. In the case of IMS-Quiintiles, investors in control of about 54 percent of IMS Health and 25 percent of Quintiles (including both companies' one-time private-equity owners) had already committed to backing the deal at the time it was announced.
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