If you believe The Wall Street Journal, there’s a lot of buzz about the IPO of revenue cycle management company Emdeon, which is planned for this week. Why? I don’t know.
That’s not to say the stock won’t pop as investors salivate over the prospect of billions of dollars in stimulus spending and growing healthcare information technology investment. But this offering shows all the signs of stakeholders looking to cash in on the favorable market perceptions surrounding healthcare IT.
“The motivation behind the public offering seems to be heavily skewed in favor of its existing stakeholders, not the company itself,” says Morningstar analyst Alex Morozov, adding, “I’d be very wary of Emdeon’s future prospects.”
Why the skepticism? For starters, Emdeon comes with a lot of baggage: $800 million in debt, $156.8 million in deferred tax liabilities, and $1.6 billion in goodwill and intangible assets. (Intangibles and goodwill make up 75% of total assets).
Margins are tight. The company posted 2008 net income of just $9.2 million on revenues of $856.3 million — a scant 1% net margin. Things were better through six months of 2009, with net margin at 3% on revenues of $444 million. Annual revenue growth rate, meanwhile, has been in the single-digits.
Yes, there’s an upside. But given the highly competitive nature of the healthcare IT market, the uncertainties surrounding healthcare reform, and the fact that Emdeon is as much about administrative paper pushing as anything else, this is an investment to pursue with caution, not excitement.
Plus, I’m skeptical anytime a transaction is so complicated it requires two organizational diagrams just to tell me who owns what pre-IPO and who will own what post-IPO.
Public shareholders would own close to 19% of Emdeon following the IPO. The rest would be owned largely by affiliates of private equity firms General Atlantic and Hellman & Friedman. Emdeon in turn would own 77% of its principal operating unit EBS Master, while affiliates of H&F would own nearly 20% and management, employees and others about 3%.
Thus, Emdeon’s net income would be reduced 23% to reflect the share of EBS profits attributable to others. Remember that 3% net margin through six months of 2009? That would be 4% without the prorated reduction in Emdeon’s earnings
Where do the IPO proceeds go?
Assuming an offering price of $14.50, Emdeon expects to raise $142.7 million in net proceeds from the sale of up to 24.7 million Class A shares. The company said it would use the proceeds for working capital – and perhaps acquisitions or to pay down debt.
About $5 million of the net proceeds would go to Emdeon chief executive George Lazenby, chief financial officer Bob Newport, and executive vice presidents Gary Stuart and Phillip Hardin in exchange for a portion of their EBS equity. Emdeon expects certain tax advantages from these exchanges; however, 85% of any tax savings would be attributable to sellers of the EBS equity.
Furthermore, owners of EBS equity would be issued 26.4 million shares of Class B common stock, which would be convertible to Class A stock on a one-to-one basis; again, any tax advantages would be 85% attributable to the Class B shareholders. Fully diluted shares outstanding would be 114.9 million, suggesting the company is valuing itself at $1.7 billion.
And you thought a night’s stay in the hospital costs a lot.
Addition (Aug 13, 2009; 10:57 a.m.): On Aug. 12, Emdeom successfully completed an initial public offering of 23.7 million shares of common stock for $15.50 per share. Shares closed at $16.52, up 6.6%.