Last week, the news broke that pharmacy chain CVS Health (NYSE:NYSE: CVS) agreed to acquire It means Health (NYSE:NYSE: SGFY) in what is ultimately a multi-billion dollar transaction. To some observers, this particular transaction may seem peculiar to CVS Health is often described as a simple pharmacy chain, while Signify Health focuses more on the value-based payment programs associated with the healthcare space. But when you truly understand that CVS Health continues to push itself to transform itself from being a simple pharmacy retailer to being formed as an integrated and diverse healthcare enterprise, the deal makes a lot more sense. Overall, the long-term outlook for CVS is likely to prove positive, with this acquisition and other recent initiatives propelling the company in the direction it wants to go. But I feel that the real winner of this transaction will be the shareholders of Signify Health. Although that company has done well to grow both in terms of profits and profits in recent years, the shares were undeniably expensive based on the agreed purchase price. So while it may seem strange to say, it appears that both parties are moving away from it better than before, with more immediate benefits accruing to Signify Health shareholders, while the long-term potential lies in investors in CVS Health.
A look at the CVS and Signify agreement
Conceptually, the transaction between CVS Health and Signify Health is quite simple. CVS Health’s management team agreed to acquire all outstanding shares in Signify Health at a price of $ 30.50 per unit in cash, placing an equity value on the company of $ 7.6 billion. The enterprise value, meanwhile, is expected to be around $ 8 billion. Prior to the announcement of the deal, Signify Health’s stock was priced at $ 28.77. But until August 19 of this year, its shares were trading for as low as $ 21.20 each. This translates into a stock premium over that time frame of 43.9%.
For Signify Health shareholders, the benefit here is simple to understand. Paying in cash results in a hefty premium in a short period of time. But of course, some investors might consider the transaction insufficient when it comes to justifying the real value of the firm. Of course, the argument here will likely be centered around the kind of growth Signify Health has achieved in recent years, with revenue increasing from $ 337.9 million in 2018 to $ 773.4 million in 2021. ‘company also saw its profits the results have greatly improved. The business went from generating a net loss of $ 28.9 million to a net profit of $ 19.7 million. Operating cash flow grew from $ 35.6 million to $ 129.9 million, while if adjusted for changes in working capital, it would have risen from $ 37.7 million to $ 130.4 million. And when it comes to EBITDA, the growth has also been impressive, with the metric going from $ 79.1 million in 2018 to $ 171.2 million in 2021.
Topline growth for Signify Health continued into fiscal year 2022. Revenue in the first half of the year, for example, was $ 462.7 million. This is 17.8% more than the $ 392.8 million generated a year earlier. While this was positively positive, the company’s earnings figures were somewhat mixed. The company went from generating a net loss of $ 23.2 million to a net loss of $ 381.4 million. Operating cash flow also suffered, falling from $ 66 million to a negative $ 35.5 million. On the other hand, the firm’s adjusted operating cash flow multiple actually grew from $ 61.5 million to $ 82.2 million, while its EBITDA went from $ 89 million to $ 107.6 million.
It’s really hard to understand what the future holds for standalone Signify Health. But management had high expectations when it came to fiscal year 2022. Previously they had expected revenues of between $ 845 million and $ 858 million. Halfway through, that would translate to a 10.1% increase over what the company generated a year earlier. Some of these were driven by acquisition-related activities, while organic growth was expected to be around 4.1% year-over-year. The only profitability metric for which management provided indications was EBITDA. The forecast was for a reading of $ 251.2 million. If we assume that adjusted operating cash flow would have increased at a similar rate, that metric would have risen to $ 191.3 million. This results in a forward price per multiple of adjusted operating cash flow of 39.7 and an EV forward multiple for EBITDA of 31.8. In the grand scheme of things, these are high enough levels for almost any business.
As for CVS Health, this acquisition substantially helps the company to further transform itself into an integrated and diversified healthcare business. CVS Health’s management team even went so far as to say that the acquisition will play a “critical role” in advancing the health services strategy the company is focused on, while also providing it with a platform to accelerate its growth in care. based on value. Management appears to be particularly interested in the acquisition’s ability to improve its connection with consumers at home and in enabling providers to better address patient needs as it seeks to redefine the healthcare experience in America. Management is also interested in the potential for expansion and development of new offerings in a multi-payer approach.
When you consider Signify Health’s overall business model, this makes a lot of sense. According to Signify Health’s management team, the company offers a variety of solutions. For example, as part of its Home & Community Services operations, it makes home health assessments available using a mobile network of accredited providers in the United States. Through these, the company creates a comprehensive and documented record of the clinical, social and behavioral needs of its clinically complex populations of its health plan clients and works to further engage them in the health system. They use data from these clients to perform advanced data analytics in order to seek out the highest priority individuals for a home health assessment and then engage those members to schedule visits before assessments are performed. Driven largely by the COVID-19 pandemic, the company has also moved on to providing these home health assessments using telemedicine capabilities. In short, this is basically the same type of evaluation, but done virtually. For some customers, the company also uses social determinants of health to direct people directly to community organizations in its network to help address issues such as food insecurity, slip and fall risk, social isolation, and more.
As part of the Episodes of Care Services segment, the company develops provider networks, creates software and provides services to support the organizations it collaborates with. It also offers health care financing that focuses on a patient care episode. The customers it focuses on include payers who offer care episode programs, as well as providers who participate in those programs while providing health services. Management also said the company is the largest participant in the Enhanced Care Enhancement Bundled Payments program that involves the company in direct contracts with the Centers for Medicare and Medicaid Services. And in this segment, the company also provides a variety of other services such as helping responsible care organizations manage post-acute care of patient populations, offering health plans a solution to manage their clinical needs and well-being. members who have complex chronic health conditions and work to transfer patients from a hospital or post-acute care facility to their homes.
This type of business should fit well with what CVS Health currently offers. Currently, the company is made up of three key operating segments. The smallest of these, at $ 82.2 billion, or 24.5% of the company’s overall revenue, is the Health Care Benefits segment. This unit operates as one of the nation’s leading diversified health care providers, with approximately 35 million people assisted at the end of fiscal year 2021. This particular segment offers its customers a wide range of traditional, voluntary and direct health insurance products. to consumers and related services. It also provides administrative workers’ compensation services and other activities. The pharmaceutical services segment, which is the largest in the company, with a value of $ 153 billion or 45.6% of total sales, offers a full range of pharmacy benefits services such as design offerings and plan administration, form management, retail pharmacy network management services, mail order pharmacy business and more. And the company’s Retail / LTC segment operates by selling prescription drugs and other products and services to its customers, including the MinuteClinic walk-in medical clinics it makes available to its customers. This particular unit was responsible for 29.9%, or $ 100.1 billion, of the company’s revenue in 2021. Last year it was also responsible for distributing an impressive 26.4% of total drug prescriptions. retail all over the country. Adding another unique company to the mix further diversifies the company and adds to the value chain to better serve customers over the long term.
At the end of the day, it’s hard to know exactly how much use CVS Health can get from buying Signify Health. But most likely, the company will be able to leverage its massive footprint to create further growth for itself and its shareholders. In the long term, I suspect the acquisition will be viewed favorably by the firm’s shareholders. As for investors in Signify Health, I would say there should be an appreciation of the move. They get a significant premium on where the shares were previously trading and this serves to transfer the risk of further growth of the firm to a larger entity who can easily bear it. While there will undoubtedly be some investors who think the premium should have been higher, especially given the company’s recent cash flow growth, I don’t think the purchase should be viewed in a negative light in this regard.