UnitedHealth (UNH/Optum) https://uhc.com recently announced an agreement to acquire Change Healthcare (CHNG) https://changehealth.com for $25.75 (41%premium to 1/5 close), equating to roughly $8.4 bin equity value (based on 325 min FD shares). Taking CHNG’s +$5 bin of debt into consideration, the transaction is valued at ~$13.4 bin and ~11x our CY22 EBITDA estimate.
CEO, Neil de Crescenzo is going to serve as OptumInsight’s CEO. CHNG notes that the company was not up for sale but the UNH offer represented compelling shareholder value.
Credit Suisse https://www.credit-suisse caught up with CHNG and UNH management teams and were surprised on the timing of the deal given CHNG’s efforts over the past 18 months or so on restructuring their business, exiting underperforming assets, and acquiring compelling entities.
In fact, Credit Suisse analysts believe that CHNG was very well positioned to exceed their LT revenue and EBITDA growth targets of 4-6% and 6-8% respectively. Further growth in FY22 (beginning 4/1/21) is expected to be well ahead of those targets given the easy comps and recent M&A transactions. Analysts report that with a 41% premium to the last close and an 11x EV/EBITDA valuation, the fact is that by combining with one of the leading healthcare entities will only accelerate growth trends.
As for anti-trust concerns, CHNG and Optum compete across some of the businesses such as payment integrity (included in Network & Financial management), risk adjustment, networks, data solutions, RCM services etc. (please e-mail us if you want access to our detailed spreadsheet with growth drivers, market opportunities, competitors, etc. by segment.)
However, analysts do not believe the combined company would be large enough in any of the businesses to raise any antitrust concerns, given how large the end markets are. In fact, CHNG management describes UNH’s OptumInsight business as highly complementary to CHNG’s assets/services.
Analysts have one major investor concern around the current administration’s increased focus on one or a handful of entities having access to a majority of data and transactions volumes. For reference, CHNG with their well-diversified business lines, is in a unique position at the center of the healthcare ecosystem, along with processing 15 bin transactions and $1.5 trillion in claims annually.
By way of background, CHNG serves 19 of the top 20 U.S payers and close to 175-million members with their payment solutions and serves 19 or the top 20 U.S payers and close to 175-200 million members with their payment solutions. The company serves 9 of the top 10 MA plans and the top 5 Managed Medicaid plans, and supports close to 50 min members across risk adjustment, quality, and consumer engagement.
The company is also the industry leader in evidence-based medical appropriateness (acute and ambulatory) criteria and provides clinical decision support to over 3,700 acute hospitals, 900 provider facilities, 250 commercial health plans, and CMS. CHNG through their enterprise imaging business, serves close to 3.5K hospitals and health systems, and ~80K office based provider customers.
CHNG is also one of the leaders in network solutions and is able to link payments, member communications, and transactional connectivity together to provide a better and lower cost end-to-end experience for all stakeholders. Finally, CHNG is also a leader in the physician RCM services market (among the top 10 in hospital/health system RCM services market).
However, this information could understandably raise concern around data concentration with leaders in the healthcare industry. However, Credit Suisse analysts believe the healthcare market is very different from the other consumer -focused markets still in their very early stages of leveraging data analytics to improve care management, enhance engagement and access, and improve clinical and financial outcomes. As a result, Optum’s argument to leverage this data to improve healthcare outcomes and generate differentiated value for their customers is likely to resonate with regulators and the administration.
Credit Suisse analysts have been hesitant to acknowledge the likelihood of the deal with investors since CHNG works with several of UNH’s competitors and as a result, an acquisition of CHNG by UNH could potentially create a conflict of interest.
Credit Suisse, in a conversation with UNH management, management reports that Optum serves several health plans (some of which compete with UNH on the insurance side), and the market very well recognizes the firewall between the two business entities. Analysts believe there is always a possibility that some payors will walk away from a combined UNH-CHNG entity, however analysts believe that the potential for this is likely already captured in the price. UNH is paying. Importantly, CHNG has a well-diversified customer base with no customer representing >4% of solutions revenue.
Analysts fielded questions as to whether another buyer (outside of UNH) could step in. On the insurer side, analysts do not believe other insurers have an IT platform and capability that rivals with what UNH has with OptumInsight so there would be relatively less value-add from a combination with CHNG from the perspective of another insurer. Analysts see OptumInsight and CHNG as relatively more complementary to one another since our view is that potential suitors will be unlikely to want to go head-to-head in a bidding war with UNH.
For more information, have questions, and/or to provide feedback, email Jailendra Singh at jailendra.singh@credit-suisse.com or call 212-325-8121.