WELL Health’s acquisition of CRH Medical gets thumbs up at Haywood

Canadian health tech company WELL Health Technologies (WELL Health Technologies Stock Quote, Chart, News, Analysts, Financials TSX:WELL) just added another pillar to its business with what Haywood Capital Markets analyst Colin Healey called a landmark acquisition.

In a flash update to clients on Monday, Healey reasserted his “Buy” rating and $11.00 target for WELL, which at the time of publication represented a projected 12-month return of 37.3 per cent.

Vancouver-based omni-channel digital health company WELL Health announced on Monday an agreement to buy CRH Medical (CRH Medical Stock Quote, Chart, News, Analysts, Financials TSX:CRH), a gastroenterology and anesthesia-focused company headquartered in Vancouver but with most of its business in the United States. The deal would see WELL pay US$4.00 per share for an aggregate purchase price of US$292.7 million. The price would represent an 83-per-cent premium to CRH’s closing share price on February 5, 2021, and a premium of about 80 per cent to the 30-day volume-weighted average price.

CRH operates in 69 ambulatory surgical centres and GI clinics across 13 states and uses a team of 670 registered nurses and physician anesthesiologists. WELL said in a press release that CRH’s core business is expected to see strong growth in 2021.

Concurrent with the acquisition announcement, WELL has entered into binding agreements with individual and institutional investors for a $295.5-million private placement equity raise under a non-brokered offering of subscription receipts at $9.80 per share. Hong Kong business leader and existing WELL shareholder Li Ka-shing was named as one of the investors.

WELL Chairman and CEO Hamed Shahbazi called the CRH purchase monumental and one that will boost WELL’s revenue and EBITDA along with grow its US operations and add further opportunities for inorganic and organic growth.

“The proposed acquisition of CRH is a fantastic opportunity to apply WELL’s expertise in digitization and modernization of healthcare clinics to GI practices in the United States,” said Shahbazi in a press release. “Furthermore, CRH’s profitability and cash-flow generation will provide WELL with ample opportunities to allocate capital and grow without dilution.”

“We also expect that CRH will continue to conduct its highly active and successful M&A program following closing,” Shahbazi said. “WELL’s technology and shared services teams will work with CRH to help digitize and modernize operations in a manner similar to how WELL has executed in the primary healthcare space in Canada.”

CRH, whose share price dropped 34 per cent in 2020, last reported earnings on November 12 where its third quarter 2020 saw revenue decline 0.2 per cent year-over-year to US$30.3 million and adjusted operating EBITDA fell 9.3 per cent to US$11.8 million. For its last reported full year, CRH hit revenue of US$120.4 million for 2019, which was up 6.8 per cent from 2018, and adjusted operating shareholder EBITDA of US$36.6 million, up 2.2 per cent from the previous year.

Reflecting on the acquisition, Healey wrote, “The deal is highly accretive to WELL on financial metrics and represents a big move into the US for WELL while establishing a seventh business pillar within WELL Health Technologies. The strong underlying financial metrics of CHR will mean significant cash-flow contributions to WELL’s balance sheet and will provide significant resources to fund WELL’s future acquisitive growth pursuits.”

Healey noted that CRH currently has a revenue run rate of US$120 million with 40 per cent EBITDA margins and 25 per cent free cash flow margins. Ultimately, he said, that will “significantly” boost WELL’s financials with a 120 per cent revenue run rate accretion and an 800-per-cent increase in EBITDA per share.

“Based on CRH’s run rate and the stated deal consideration, the acquisition represents an EV/Revenue multiple of 3.1x and an EV/EBITDA multiple of 7.7x suggesting WELL is acquiring CRH at a significant discount to its own valuation where WELL was trading at 11.4x our 2021 revenue estimate and 8.9x our 2022 revenue estimate,” Healey wrote.

The analyst is calling for WELL to generate full 2020 revenue and EBITDA of $50.1 million and negative $0.7 million and 2021 revenue and EBITDA of $114.6 million and $8.1 million, respectively. Along with his reiterated “Buy” rating Healey maintained his “Top Pick” status for WELL, saying the company continues to enjoy strong momentum spawned by the market’s recognition of its strategy and execution. (All figures in Canadian dollars except where noted otherwise.)

Healey said WELL’s valuation remains high based on current peer revenue multiples but that the company will likely grow into its valuation in time with its revenue growth potential and movement into the US.

“We continue to like WELL, underpinned by strong management and evolving technical offering,” Healey wrote. “We believe that the global pandemic has permanently redefined healthcare norms and tele-health take-up and stickiness will prevail as the preferred mode of healthcare consultation whenever possible.”

[Disclaimer: Nick Waddell and Jayson MacLean own shares in WELL Health and the company is an annual sponsor of Cantech Letter.]