Credit Suisse’s https://www.credit-suisse.com quick thoughts on the Third Point (6.4% stake in CANO) filing a 13D that wants the CANO https://canohealth.com Board to commence a review of strategic alternatives with the focus being on a sale of the company. The investment firm believes that a properly run sales process is likely to result in offers representing a substantial premium to the current share price.
Recall CANO became a publicly traded company via a de-SPAC process in June of 2021 (the shareholder vote date), and the SPAC related negativity has been a major overhang on shares since.
While the jury is still out on fair valuations and steady state margin/profitability for the whole group, the market opportunity related to capitated models and value-based care (especially in Medicare) remains attractive. Except for the recent update related to the Medicare Risk Adjustors revenue recognition timing, CANO’s results have also been relatively steady and better than expectations.
Further trading at 1.2x our 2022 revenue and 18.7x our 2022 EBITDA estimate (before today’s share price reaction), valuations do not necessarily reflect the strong execution by the CANO management team. In fact, Third Points’ 13D filing also notes that the investment firm has confidence in the company’s operating strategy and management team.
As the Credit Suisse analysts discuss below, the continuing Private Equity interest in the space and willingness to expand on their Primary Care delivery strategy by most of the publicly-traded MCOs and retail companies, the analysts believe there will be enough interested parties in the event CANO explores that alternative.
However, the analysts believe that a wide bid-ask spread in the HCIT/Digital Health space has been the primary reason for a relatively modest M&A activity despite the valuations re-rating over the past 12 months.
Credit Suisse briefly caught up with CANO management. CANO emphasized that they remain recused and continue to believe in their strategy and operating model of growing market share and delivering high quality care to members.
Further, management notes that they continue to have active conversations with all of their top shareholders, including Third Point. Notably, Third Point noted in their filing that the firm has not planned to pursue a proxy contest with CANO but may consider initiating a proxy contest seeking to elect one or more members of the board and bring other such proposals in the event CANO’s Board does not commence a review of strategic alternatives.
As for potential partners: PE Firms, Strategic Buyers, WBA increased their ownership stake from 30% to 63% of VillageMD ( a privately held Tech enabled PCP company). For more information, go to the Note HCDT&I Series—A Vast Ocean of Opportunity: VillageMD Management Meeting Takeaways) through an additional $5.2 bin investment. Likewise, CVS has been very vocal about advancing their primary care delivery capabilities with M&A potentially a key component of the strategy.
From a PE interest point of view, the analysts note CANO’s current Board members include Elliot Copperstone, the Founder and Managing Partner of In Tandem Capital Partners, a leading PE firm that invests in and accelerates the growth of small to mid-sized companies in select healthcare and insurance services sectors, Angel Morales, the Founder and CEO of Morales Capital, an investment firm focused on PE opportunities in mission-oriented companies managed by Latinos and other underrepresented groups, Alan Muney, a senior healthcare advisor for several private investment funds, and Barry Sternlicht, Chairman of Jaws Acquisition Corp (SPAC) who owns 19.3% of CANO shares.
For information on the prior note (HCDT&I Series: A Vast Ocean of Opportunity VillageMD Management Meeting Takeaways) ask questions, provide feedback, or news, email Jailendra Singh at jailendra.singh@credit-suisse.com or call +1 585 -260-0962.