Description

We believe an investment in TMH offers attractive risk/reward. This is very straightforward so we will keep the write-up short and sweet.

On Monday, Blackstone announced an agreement to buy TMH for $43.50/sh in cash, pursuant to a 40 day go-shop period. We view a reasonable downside case to be this Blackstone deal closing in 3-6 months, representing a +3-7% IRR. There is a viable upside case from a higher bid. In the current low yield environment, buying TMH today is an attractive proposition.

We believe the Blackstone buyout is the reasonable downside case:

1.       Blackstone is a very well-regarded, well-capitalized acquirer who should have no problem accessing the capital required for this deal. It is likely much of the contribution will be equity, given the debt load already in place at TMH.

2.       Blackstone actually owned TMH from 2005-2009, so they are intimately familiar with the company.

3.       TMH’s third largest shareholder, JANA, which also has Board representation, has publicly given its support for the deal.

4.       TMH has been having well publicized issues with the large acquisition it made of IPC last year, and management and shareholders both likely prefer to take the money now and deal with the issues as a private company, rather than struggle through the challenges in the public market.

And we believe that higher bids could emerge:

1.       Blackstone’s bid suggests a low valuation for the company as it is a low multiple on a depressed earnings number.

a.       Blackstone’s offer is at ~10.5x 2017 EBITDA, while TMH has traded at closer to 12x fwd EBITDA on average over the past four years.

b.      One year ago, in November 2015, competitor AMSG offered ~$70/sh for TMH, which equated to ~14x fwd EBITDA. TMH rebuffed the offer at the time and instead bought IPC, and AMSG in turn acquired EVHC.

c.       Blackstone’s offer may actually be at ~9.5x EBITDA, or even a lower multiple. This is because the 2017 EBITDA is itself a depressed number. TMH has had significant problems with IPC, whose earnings have deteriorated markedly. Any ability to turn around this business could lead to meaningful earnings upside. The EBITDA figure also notably excludes BPCI contributions (bundled payment initiative), which could add another $40-50mm or more to EBITDA in 2017, taking a full turn off the EBITDA multiple.

2.       There are other viable buyers of TMH.

a.       Strategic Buyers: consensus view is that AMSG is busy digesting EVHC, but given the significantly reduced multiple for TMH, they could reengage. Other strategics such as Mednax or Fresenius could also show interest as TMH is a unique asset.

b.      Financial Buyers: other PE shops could also emerge. TMH has been in the hands of various PE owners in the past (even before Blackstone’s first go-round). As previously mentioned, the Blackstone bid represents a relatively low EBITDA multiple for this business. A simple LBO model suggests that a buyout even into the low/mid $50s could offer attractive returns for a PE buyer.

So, bottom line, it is hard to know exactly where higher bids would be, but we think TMH offers a mid-single digit IRR if no other bids emerge, and potentially something much greater if they do.

Some basic background on TMH:

TMH provides outsourced staffing and administration services to hospitals and other healthcare providers in the US. The primary business line is ER staffing (~55% of revenue), where TMH is the market leader. Other services include Hospitalist/Acute/Post-Acute care (~29%), Anesthesia (~9%) and other various offerings (~7%).

a.       Basics

1.       Presence in 47 states and >3,400 facilities, with ~19k affiliated physicians. 17% of revenue (ex-IPC, in 2015) was from Florida, 10% Ohio, and 9% Tennessee

2.       Volume mix: ~32% Medicare, ~32% Commercial, ~23% Medicaid, ~12% Self pay/other.

3.       Why does this business model make sense?

a.       TMH specializes in running the most operationally complex aspect of the hospital –the ER – with complicated staffing, coding, collections, etc. Hospitals increasingly understand this is not their forte

b.      TMH can use its ER relationships to offer hospitalist and anesthesiologist services to clients

c.       Physicians like working for orgs like TMH because they don’t have to worry about regulatory, collection, managed care negotiations, insurance, etc aspects of their job. They get stable employment from a reputable organization and can focus on just practicing medicine.

d.      TMH’s scale offers it advantages over smaller operators and a CA in offering services across a large client’s portfolio of hospitals

b.      Markets

1.       ER

a.       $12b TAM (this is a subset of all hospitals – TMH only considers ~2,800 of the ~5,000 hospitals to be their target market)

b.      TMH #1 player with 17% market share

c.       21% share held by other national players, 8% by regional players, and 54% by local groups or insourced

2.       Hospitalist

a.       $12b TAM (also a subset of all hospitals with ~2,800 of the ~5,000 hospitals considered target market)

b.      TMH #1/2 player with 7% market share

c.       11% held by other national players (primarily Fresenius), 7% by regional payers, and 75% by local groups or insourced

3.       Anesthesia

a.       $21b TAM (also a subset of all hospitals with ~2,100 of the ~5,000 hospitals considered target market)

b.      TMH #2/3 player with 5% market share

c.       15% held by other national players, 4% by regional players, and 76% by local groups or insourced

c.       History

1.       Founded in 1979. In 1995 was acquired by Pacific Physician Services, a physician practice mgmt co, and in 1996 PPS was acquired by MedPartners, a larger physician practice mgmt. co.

2.       In 1999 Med Partners sold TMH to a consortium of PE firms led by Onex.

3.       In 2005 Onex et al sold TMH to Blackstone.

4.       In 2009, Blackstone IPO’d TMH.

Disclaimer: This write up is not investment advice or a recommendation or solicitation for any fund or person to buy or sell any securities now or at any time. The author and related persons may hold a position in the securities discussed above and makes no representation that it will continue to hold long or short positions in the securities and disclaims any obligation to notify the market of any changes. You should not assume that an investment in the securities identified was or will be profitable.

Catalyst

Higher Bid or Blackstone deal closes