Announced private placement for WELLSTAR (WPS) at premium valuations; PT to $7/sh
Our view: WELL announced a private equity placement of $50.4MM at WELLSTAR (previously WPS), valuing it at a pre-financing EV of ~ $285MM, above our ~$214MM valuation for the SaaS business in our SOTP. Management anticipates to spinout WELLSTAR in 2025 and reiterated its intention of maintaining the majority of the economic and voting interest in WELLSTAR. Separately, we note the news of ELNA Medical entering creditor protection (here) underscores the challenges in operating clinics in Canada, where WELL has demonstrated continued success and has built capabilities in turning around loss-making clinics. We raise our PT to $7/sh.
Key points:
$50.4MM private equity placement at WELLSTAR to fuel pre-spinout growth phase, M&A. WELLSTAR issued $45MM of preferred shares to Mawer, EdgePoint, and PenderFund plus an additional $5.4MM of preferred shares to management at both WELLSTAR and WELL. WELL noted that the investment values WELLSTAR at a pre-financing EV of ~ $285MM (post-financing EV of $335.4MM). WELLSTAR used a portion of the proceeds to fund the acquisition of two healthcare technology companies (details below), while the remaining proceeds are anticipated to fund future M&A as well as general corporate purposes.
WELLSTAR closed on two tuck-in acquisitions, for a total consideration of ~$28MM. The targets include a) a Canada-based regional EMR (100% acquisition) and b) a nationwide healthcare technology services company (51% acquisition, with a call option to acquire the remaining within 5 years for a defined purchase price). In aggregate the two acquisitions contributed ~$15MM in annual LTM revenues with EBITDA margins of ~20% per management. We estimate an acquisition multiple of 2.5x-3.1x EV/LTM revenue proportionate to WELLSTAR's ownership and 12.4-15.4x EV/LTM EBITDA proportionate to WELLSTAR's ownership, with the valuation ranges being estimated on a 50%/50% - 80%/20% revenue split between the 51% ownership and 100% ownership, and assuming ~20% EBITDA margins for both the acquired companies.
PT raised to $7/sh. We have updated our model to incorporate the announced acquisitions, the funding raised, updated FX and mark-to- market the HealWell Investment. In our SOTP, we have now split the SaaS segment into WELLSTAR and the Cybersecurity business. We value WELLSTAR close to the valuation following the fund raise and adjust it for MI at WELLSTAR and have valued the Cybersecurity segment at a discount to WELLSTAR given lower margins. As a result, our SOTP valuation is $6.17/sh. Our updated DCF valuation is $8.24/sh. The average of these two methodologies results in $7.20/sh rounded to our $7.00 price target. The SOTP valuation yields a lower valuation vs. DCF, given that not all business segments are currently fully optimized for profitability, which exerts downward pressure on our 2025 forecasts.