TD Maintain their $8.00 target. GLTA
GOING SHOPPING FOR MORE CLINICS
THE TD COWEN INSIGHT
WELL has agreed to acquire 10 primary care clinics from Shoppers Drug Mart, which
are expected to generate ~$8mm in annual revenue. These clinics are being "absorbed", suggesting WELL is paying a relatively low price for them (we estimate ~$2mm or less). We believe this deal highlights WELL's attractive opportunity to acquire struggling and/or non- core clinics, even from large-pocketed owners.
Impact: SLIGHTLY POSITIVE
Operating primary clinics is not easy. We believe the company continues to execute well on its clinic roll-up strategy, applying its playbook to significantly improve the efficiency and profitability of the clinics it acquires/absorbs. It looks to get clinic Adjusted EBITDA margins at least into the 5%-10% range within the first year, with further improvements to margins (at least into the low double-digits) targeted in subsequent years.
Given the 10 clinics from Shoppers are being absorbed, we believe they were generating little to no profits. We think this could be another example of professional/corporate management not being able to operate primary care clinics efficiently and profitably, and like the CloudMD and MCI Onehealth deals, WELL has been able to capitalize by acquiring their network of (unprofitable) clinics for nominal consideration.
We believe this deal also highlights the attractiveness of WELL's capital efficient and accretive clinic acquisition/absorption strategy that we think can be fully funded by its FCF.
One of many deals in its healthy clinic acquisition/absorption pipeline. Following this deal, WELL will have ~40 opportunities in its clinic M&A pipeline, including ~10 clinic absorption candidates. We believe the pipeline will remain robust, as more family doctors realize
the significant benefits of joining WELL's clinic network (e.g., similar or better earnings potential, reduced administrative burden, access to WELL's suite of clinic software/ solutions, more free time), even if they sell their clinic for very little consideration.
Acquisition overview. Six clinics are in Ontario and four are in B.C., with all being corporately-owned. There are >35 physicians (not all full-time) and WELL plans to recruit more physicians to join these clinics. The clinics will also be rebranded under the WELL Clinic brand (from "The Health Clinic by ShoppersTM") once the deal closes later this quarter.