February 03, 2022 - 10:02am EST by
2022 2023
Price: 19.32 EPS 0 0
Shares Out. (in M): 336 P/E 0 0
Market Cap (in $M): 6,467 P/FCF 0 0
Net Debt (in $M): 4,582 EBIT 0 0
TEV (in $M): 11,049 TEV/EBIT 0 0

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CHNG is a high quality, sticky healthcare software business trading at a material discount to its private market value obscured by a busted merger arb scenario.  CHNG has now materially underperformed the market from its undisturbed price ahead of the unsolicited UNH offer, while at the same time multiple transactions and datapoints have occurred that would suggest the UNH offer of $25.75 is well below private market multiples. We wrote up CHNG shortly after its IPO and subsequent split-off from Mckesson, and would refer readers to that detailed write-up of the business, which still is generally true today.  This write-up will focus on what has transpired since the UNH proposal and how we think about the opportunity here.  We expect one of four paths to occur from here, in order of their likelihood:

1) Deal breaks and CHNG pursues a full sale of the company through a competitive process

2) Deal breaks and CHNG continues to operate as a public company, eventually re-rating as people appreciate the quality of the business and more substantial public company track record (in-line with our original thesis).

3) DoJ sues to block the CHNG / UNH deal from occurring, at which point CHNG negotiates a better offer and break protections and fights the DoJ with UNH in court.

4) CHNG / UNH deal goes through after a settlement is reached with CHNG / UNH divesting assets to appease DoJ.

To be clear, it is our view that the DoJ is more likely than not to sue to block the deal, despite recently leaked headlines of CHNG trying to divest assets - so we will spend little / no time on the merger arb aspect of this and all our time evaluating the company on a standalone basis.

At current prices, we own a dominant healthcare software franchise with LSD-MSD growth prospects at 10.3x LTM EBITDA.

See prior write-up for very specific details on the assets we own.  Since the last write-up, CHNG divested two of its declining software / analytics assets within its Software and Analytics segments, and added attractive ErX / PDX network assets via acquisition at attractive multiples.  We estimate the software and analytics business is growing organically roughly 5%, while the network business should grow at a simillar rate organically over time, driven by growth in payments, data, ErX & PDX offset by flat or LSD growth in the core network business.  More recently, organic growth has been stronger as the company laps weak results from the pandemic combined with some modest tailwind from vaccinations / higher medical claims.

CHNG has materially underperformed the market vs. its unaffected price before the announced transaction with UNH:

CHNG has underperformed the S&P 500 by about 17%.

Multiple take-outs of simillarly mature software assets subject to competitive bid processes have been a substantial premiums to the Change/UNH deal:

We think the recently announced CERN transaction from 12/20 is probably the best comp to CHNG.  Like CHNG, Cerner operates as a low growth but dominant software business.  It was acquired for 14.9x 2022 EBITDA by Oracle, a material premium to the ~12x NTM EBTIDA offered by UNH implied at $25.75.  Furthermore, the CERN proxy indicates multitudes of inbound interest by PE and other parties in the summer of 2021 ahead of the Oracle transaction.

We'd also point to a number of recently announced / rumored transactions in Healthcare IT assets, in addition to the older transactions noted in the previous writeup:

  • AthenaHealth acquired by H&F + Bain consortium in Nov 2021 for >16x NTM EBITDA
  • Inovalon (INOV) acquired by Nordic Capital consortium in Aug 2021 for >25x NTM EBITDA
  • HMS Holdings (HMSY) acquired by Vertias Capital (Gainwell) in Dec 2020 for >17x NTM EBITDA
  • Cotiviti exploring a sale for $15bn in Dec 2021, after creating the company for what we assume to be ~$7bn. The core Cotiviti platform was acquired for $4.9bn in 2018 for a healthy ~16x EBITDA multiple. 

Also noteworthy are the multiples of recent mature software acquisitions - e.g. both Citrix and Cornerstone OnDemand were acquired this year by private equity sponsors for ~16x NTM EBITDA each. 

CHNG received an unsolicited proposal from UNH that was formulated at a time of substantial turmoil both in its business and in the equity markets, and negotiated an agreement that we believe is not indicative of the true private market value of its assets.

  • In May 2020, with CHNG stock in the $10-11 range and the country and market still in the throes of covid, UNH approached CHNG about a potential transaction. 
  • Conversations continued throughout August, with no discussion of valuation, but heated up in September when CHNG hired Goldman Sachs as its advisor.  In October, UNH made an indication of interest at $23 a share, with the stock at $15.09 a share, a value CHNG deemed insufficient.  This number subsequently increased to $25.30, which CHNG also rejected, and was countered with a best and final proposal of $25.75 a share on November 20th and requested CHNG enter a 45 day exclusivity period to negotiate a transaction
  • The deal was subsequentially agreed to and announced January 6th 2021.

In the event that the CHNG remains a public company, we expect it to grow EBITDA MSD over time and eventually re-rate closer to mature software peers

Today's price still represents a material discount to what we believe is fair public market value. Public mature software peers trade a smidge over 13x EBITDA, which lines up with our SOTP valuation from our previous writeup. At that multiple, Change Healthcare shares would be worth ~$30, or >50% upside from here.


  • The company has now been in M&A limbo to a very large health insurer for over a year.  Although the software is sticky, this potential deal definitely has caused some degree of consternation within the customer base, especially the payor customer base.  We think the impact of this has been limited, the company has confirmed as much, but this is hard to be precise with.
  • A lot of the supportive PE multiples are driven by a combination of easy credit and low interest rates.  To the degree these conditions change, valuations are probably lower than some of the ones cited here.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


  • Doj sues to block transaction which removes arb overhang 
  • subsequent sale / announcement of strategic alternatives
  • renegotiation of merger agreement with unh to fight doj suit, including higher price and better break protections for change 
  • continued performance of the business 
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