Credit Suisse’s https://www.credit-suisse quick review of the Teladoc (TDOC) https://www.teladoc.com /Livongo (LVGO) https://www2.livongo.com merger proxy notes April through August 2020, that showed TDOC management evaluated the potential acquisition of three large privately-held companies in the virtual care space, as well as a merger with LVGO.
Discussions between TDOC and LVGO started on June 13th, with the two companies signing a mutual disclosure agreement on June 24th. TDOC’s initial proposal on July 22 represented a value of $130/share for LVGO (18% premium to LVGO’s closing share price on 7/22).
However, the timing and the expected impact on the share price from the two company’s “then to be released” earnings resulted in back and forth between the two parties discussing how the prevailing trading share prices of the two companies and the implied exchange ratio did not appropriately reflect the relative value and pro forma ownership in the combined company.
Both companies wanted parity in the market’s understanding of the two companies’ 2Q20 results before the exchange ratio for the potential business combination was determined. To accommodate this, LVGO proposed a fixed pro forma ownership (40%) for LVGO shareholders in the combined company if the LVGO share price ranged between $134 and $142, and the exchange ratio and ownership would be adjusted if the value is outside of that range.
TDOC countered with a revised proposal with the range for LVGO share price to be $131-$139/share for LVGO which was originally supported by LVGO as a preliminary matter on the basis of “then” share prices.
Post TDOC’s 2Q20 results on July 29and TDOC’s share price that day, TDOC’s proposal implied $131/share purchase price for LVGO (an 8% premium) and approximately 43% pro forma ownership of the combined company for LVGO’s shareholders.
However, given the increase in LVGO’s share price in late July/early August, LVGO’s management determined that their Board was unlikely to support the proposed transaction unless the price implied by the exchange ratio reflected a premium (no less than 10%) to LVGO’s then prevailing stock price. After some back and forth, the two parties agreed on the implied purchase price of $158.98/share for LVGO with ~42% pro forma ownership of the combined company for LVGO shareholders.
During the process, TDOC management reiterated several times that expansion into chronic care is the most meaningful pathway to advance TDOC’s strategy and LVGO represented the most impactful transaction.
LVGO had internally discussed exploring other potential alternative strategic opportunities. They also discussed the strategic rationale for business combinations in various telehealth verticals and the strategic rationale of a business combination with such parties.
LVGO discussed these topics including the execution risks association with an acquisition strategy and determined not to initiate a market check based on the fact that a combination with TDOC was a unique strategic opportunity that could not be replicated through a transaction with another party or through a series of other acquisitions.
In an updated call on September 3, TDOC/LVGO saw a combined U.S TAM of $121 bin. TDOC highlighted: U.S TAM of $20 bin for General Medicine (1.25 bin annual visits-33% treatable via telemedicine with $50/visit average fee), $15 bin for Behavioral Health (216 min annual visits -80% treatable via telemedicine-$90/visit average fee,) $28 bin for Expert Medical Opinion (5.1 min annual incidences-$5.5K case rate), $11 bin in Hospitals/Health Systems Space (1 min U.S. physician care teams~$125/month, 1.5 min endpoints~$535/month), $28 billion for Diabetes (31.4 min patients with diabetes -$900 Per Patient per Year (PPPY)) and $19 bin for Hypertension (39.6 min patients-$470 PPPY).
As for cross selling existing products, the two companies plan to focus on selling TDOC and LVGO products across existing direct to employer and health plan relationships, by expanding LVGO into TDOC’s small and medium business, Managed Medicaid, and hospital and health system segments, and develop an integrated behavioral health product with complementary TDOC and LVGO assets and distribute them within both existing customer bases.
TDOC believes that the two companies can hit 3 min by 2022 (5.1 min by 2025) in new covered lives with access to LVGO from cross selling. This combined with the prevalence of conditions managed by LVGO, current LVGO enrollment rate and churn could result in 117K new lives from cross-sell by 2022 and 250K lives by 2025.
With respect to referrals, the two companies plan to focus on increasing enrollment and utilization by referring individuals across TDOC and LVGO products (when they have access to both) and amplify overall engagement and retentions. Specifically, the two companies expect 13K new enrolled LVGO individuals by 2022 and 147K by 2025 as part of referrals.
As for international sales, the two companies plan to use TDOC’s international salesforce to drive sales of LVGO products to international insurers, employers, and governments. LVGO’s international companies see significant additional synergies using integrated capabilities such as:
- Next Gen Specialist Care to combine medical specialty and chronic condition services in order to expand offerings and cover new customers’ needs with a full stack solution
- Virtual Primary Care 2.0 (with integrated virtual primary care and always-on chronic condition support, take risk-based payment and capture greater primary share from payers or risk bearing providers
- Hospital-at-Home to use critical care provider network and InTouch virtual care delivery platform, and LVGO connected devices to deliver acute services in the home
For more information and to provide feedback, email Jailendra Singh at jailendra.singh@credit-suisse.com or call 212-325-8121.