Description

I know this idea was posted less than 6 months ago but this long thesis is about a potential bidding war emerging for QHR vs Slacktide's correct call on the general undervaluing of the business. 

Imagine you are a large cap company, one of the biggest in your country. You have a side division that is small but in an attractive niche and you are the market leader. This division is one that lends itself naturally to a winner take all scenario and you have spent the last 5 years rolling up smaller players to be the market share leader with 20%. The number 2 player has 10% share and everyone else is low single digit share. Now another large cap comes out of left field to buy out that 10% competitor. They are paying a full price financially, but how much would you spend to strategically not only block a large player from entering the space, but also to close the door forever on someone being a viable competitor? That is the scenario Telus finds themselves in right now in Canada. Loblaw announced yesterday an all cash deal for QHR, and Telus is in a now or never situation to make a higher bid.

QHR is the largest pure play EMR provider in Canada. Slacktide did an excellent write up of them back in March and the stock is up 115% since. Here’s a link to his work that outlines the company and industry in a little more detail. https://www.valueinvestorsclub.com/idea/QHR_CORP/138184/messages/116303#description

I won’t bother rehashing as this is a simple heads you win tails you break even situation. QHR announced yesterday an all cash transaction whereby Loblaw will acquire the company for 170mm total or $3.10 per share. This equates to about 20k per subscriber or about 5x revenue if each subscriber generates 4k a year (close enough to actuals). This is a full price and the largest holder, PenderFund, has agreed to the offer. However the deal process is what leaves upside to buying at the deal price.

From the call held last night, Loblaw approached QHR with an unsolicited bid and entered 2 weeks of exclusive negotiations before making the announcement. Telus has not had an opportunity to make an offer. QHR has the right to a go shop period and there is a 6mm break fee payable to Loblaw should a stronger bid emerge.

This is the last large EMR player available, after Telus announced they are acquiring Nightingale last month. Nightingale at one point was equal in size to QHR but has fallen on hard times and are selling themselves to Telus. Nightingale was losing money and Telus is making the acquisition to acquire their 2.2k users. Combined with Telus’s existing base of 15k users, Telus should have around 22% of the estimated 80k physician market. QHR at 7.7k users as of June 30^th is sitting just under 10%.  Beyond these companies, the next biggest platform is OSCAR which is an open sourced EMR platform (which brings a whole host of security issues), and thus not really a viable acquisition target.

Beyond QHR and Telus there are no realistic acquisition targets for someone looking to enter the space. Starting from scratch would be incredibly difficult as it is a very sticky business and Telus and QHR have a massive head start. By acquiring QHR, Telus would be shutting the door on future competitors and would take a commanding 30% market share. While the market is not big (80k DRs, 5k yearly revenue once upsold = 400mm revs annually), it is a high margin, sticky business where it is natural for one platform to emerge victorious and turn into a long term annuity for the owners.

Loblaw is a surprise buyer but there is a decent fit with their Shoppers business (largest pharmacy chain in Canada). They would be a new, well capitalized player in the space.

On a personal note, I have heard that Telus CEO Darren Entwistle has personally pushed Telus to enter the EMR space and it is close to his heart. He is an aggressive man and hands on operator.

Risks

Telus may be prevented from bidding due to anti competition rules. For the strategic reasons why Telus may buy QHR, the government may look to block it. I have asked QHR management in the past if the competition bureau would block a merger with Telus and they told me they didn’t believe so as the space is too small. As well Telus would be going from roughly 20% market share to 30%. That said, the government may look favorably on Loblaw being a large competitor to Telus as consumers (physicians) will win if they both invest heavily in the space and drive innovation.

A further risk pointed out by the sell side analyst at Laurentian Bank (probably best analyst on the name in Canada) is that Telus is one of the providers of the Loblaw backend IT network. A battle for QHR may create bad blood between the two and this may prevent Telus from being overly aggressive in a bidding war.

As with any deal, there is always deal risk, but with an all cash offer of $3.10 per share representing a total of $170 million this is a small acquisition for Loblaw and it is unlikely something would happen that would make them walk away. The largest shareholder has already agreed to the terms of the deal.

Conclusion:

If like me, with the markets at all-time highs, you are sitting on a heavy cash position, QHR represents a good risk reward opportunity with the most likely outcome being a zero return for a 3 month hold but a real chance that a bidding war emerges between Telus and Loblaw over the last remaining EMR platform of size in Canada.

Catalyst

Bidding war breaks out between Telus and Loblaw