It certainly raises the possibility that they will soon initiate coverage of WELL GLTA
February 9, 2021
CRH Medical Corp
To be acquired by WELL Health for US$4.00/sh - Downgrade to SP
Our view: The announced acquisition of CRH by WELL Health implies an ~80% premium and would remove valuation downside risk related to the potential loss of CRH's largest customer. We increase our rounded price target to C$5.00 from C$4.00 and downgrade CRH to Sector Perform from Outperform, reflecting the announced cash acquisition price.
Key points:
WELL Health Technologies (TSX: WELL; not covered) has agreed to acquire CRH for US$4.00/sh (~C$5.10/sh), an 83% premium to CRH’s prior closing price, and an 80% premium to its 30-day VWAP. Total consideration is ~US$369MM (~US$293MM of cash and the assumption of CRH’s credit facility). This represents ~10x our 2021E EBITDA to SH of ~US$36MM (CRH's GI practices typically have a minority interest). In December, CRH's largest customer (United Digestive, guided to contribute ~20% of 2021 EBITDA) stated it does not intend to renew its contract with CRH beyond Oct. 2021, although negotiations are continuing. Given the related uncertainty we view the implied takeout value as fair, noting ASC/ anesthesia comps are currently trading at ~12x EV/EBITDA (Appendix I).
We believe the transaction should strategically position CRH's business for future growth. WELL is a Canadian digital health company (~US$1.1B market cap) which owns and operates 27 clinics in Canada and provides digital EMR services to 2,200 clinics. CRH will be operated by current Chairman & CEO Dr. Tushar Ramani. WELL plans to digitize CRH’s GI practices, with potential for operating synergies and digital cross-selling, and expects the business to continue to grow via M&A.
Acquisition expected to close during Q2/21. WELL plans to complete a C$295.5MM private placement and finance the remainder of the acquisition with debt/cash on hand. The transaction requires approval of 2/3 of CRH shareholders, as well as regulatory and legal approvals, and is subject to non-solicitation and right to match provisions. A $10MM termination fee is payable by WELL/CRH in certain circumstances.
Pro forma outlook. FactSet consensus for WELL suggests 2021E and 2022E EBITDA of ~US$5.7MM and ~US$13.2MM. Based on our standalone estimates for CRH, this implies combined 2021-22 avg. EBITDA to SH of ~US$48MM assuming CRH's UD contract is renewed, or ~US$44MM in a termination scenario. We estimate pro forma net debt of ~US$87MM. On this basis, we believe WELL is currently trading at an implied pro forma '21-22E avg. EV/EBITDA multiple of ~30x/33x with/without CRH's UD contract, prior to potential synergies and acquisitions.
Revised valuation based on announced deal terms. We increase our rounded price target to C$5.00 (from C$4.00) and downgrade CRH to Sector Perform, with the shares currently reflecting the acquisition value.