WPS RAISES ~C$50MM AND COMPLETES TWO TUCK-IN ACQUISITIONS
THE TD COWEN INSIGHT
The spin-out of WELLSTAR remains on track for 2025, with the ~C$50mm raise bringing strong institutional investor support and funding to help drive continued strong growth and profitability. We believe the spin-out will help management unlock shareholder value, along with the potential near-term sales of Wisp and Circle. We think some of the recent share price strength reflects these NT catalysts.
Event: This morning, WELL announced it completed a C$50.4mm private placement in WELLSTAR (fka WPS) and completed two tuck-in acquisitions.
Impact: SLIGHTLY POSITIVE
Significant growth funding. The C$50.4mm private placement is directly in WELLSTAR (i.e., no issuance of WELL's stock), which it plans to spin-out in 2025. The PP investors are Mawer, Edgepoint, PenderFund, who as a group purchased ~C$45mm in WELLSTAR preferred shares (~13%-14%), and WELL/WELLSTAR management, who purchased ~C $5.4mm. The preferred shares will automatically convert to subordinate voting shares upon a qualifying IPO, RTO public listing, or alternative liquidity transaction.
WELL has retained a significant majority economic (~85%) and voting interest in WELLSTAR, which it expects to keep in the long-term given the strategic value to WELL's business.
WELL indicated that the investment values WELLSTAR at a pre-financing EV of ~C$285mm, which implies a valuation of ~4.1x pro forma revenue and ~20.4x EBITDA. We believe the valuation (EV/Revenue) is at a discount to publicly traded peers (~5x-8x), reflecting a private company/liquidity discount and related risk should WELLSTAR not go public.
Acquisitions increase scale. The PP will be used to fund WELLSTAR's pre-spin-out growth plans, including the two acquisitions which cost $17.9mm in cash, $3.9mm in WELLSTAR shares, and $6.2mm in deferred consideration including anniversary payments and a multi- year earn-out.
These acquisitions are expected to add >C$15mm in revenue, as they had ~C$15mm in LTM revenue and ~20% EBITDA margins, implying a purchase price multiple of ~1.9x revenue and ~9.3x EBITDA.
One acquisition involves the purchase of a ~51% stake in a leading nationwide healthcare technology services company with the other acquisition being a Canadian regional EMR vendor.
The two acquisitions are expected to boost WELLSTAR's pro forma revenue to >$70mm in 2025 (including ~$10-$15mm in expected organic growth of the combined business), with gross margins of >80% and EBITDA margins of ~20%. Furthermore, >90% of WELLSTAR's revenue is recurring SaaS revenue with its better than Rule of 40 performances expected to continue.