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Shares of Roper Industries (ROP) are trading with year to date gains of 11% so far. Shares have recovered from recent lows of $119 per share after the provider of engineered products announced the acquisition of Managed Health Care Associates.

The Deal

Last week Roper Industries announced that it has agreed to acquire privately-held Managed Health Care Associates for $1 billion in cash.

MHA provides services and technologies to support alternate site health care providers delivering outside of acute care hospital settings. Its software and analytical services allow customers to manage reimbursements, cut down on complexity and operate more efficiently.

CEO and Chairman Brian Jellison commented on the deal, "MHA meets all of Roper's key acquisition criteria and is an excellent addition to our Medical platform. The business provides the leading network of solutions to alternate site healthcare market. The company has attractive cash return characteristics and generates substantial recurring revenue through long-term customer relationships and very high retention rates."

Roper expects that the deal will be immediately cash accretive, and add over $95 million in EBITDA in the first twelve months following completion of the deal. As such, the deal values MHA at 10.5 times annual EBITDA accretion. Roper did not release revenue nor net earnings results for MHA.

Roper anticipates to close the deal within a month's time. As usual, the deal is subject to regulatory approval and other customary closing conditions.

Valuation

Roper ended its fiscal year of 2012 with $370.6 million in cash, and equivalents. The company operates with a total of $2.0 billion in short and long term debt, for a net debt position of approximately $1.6 billion.

For the year of 2012, Roper generated annual revenues of $2.99 billion, up 7% on the year before. Net income rose by 13% to $483 million, or $4.86 per diluted share.

The market currently values Roper around $12.2 billion. This values the firm around 4.1 times annual revenues and 25 times annual earnings.

Roper Industries currently pays a quarterly dividend of $0.17 per share, for an annual dividend yield of 0.5%.

Some Historical Perspective

Roper Industries has a great history of creating substantial shareholder value. Shares steadily rose from $20 in 2003 to highs of $70 before the global crisis hit in 2008. Shares fell back to $40 during the recession and have tripled ever since, exchanging hands around all time highs at $125 per share.

Between 2009 and 2012, Roper increased its annual revenues by almost 50% to almost $3.0 billion. Net income doubled over the time period, coming in at $483 million over the past year.

Investment Thesis

Roper's strategy has paid off handsomely over the past years. Its leadership positions in niche markets offers the company plenty of diversification as it serves a broad customer base across industries.

By focusing on niche markets, the company achieves superior profitability and cash flows, which combined with an asset-light business model, has created significant shareholder value.

The deal marks Roper's latest effort to expand in the medical business, which currently makes up a quarter of total revenues and operating profits. Roper has aggressively grown its medical business in recent years. Last year it acquired Sunquest Information Systems in a $1.4 billion deal to bolster the division. The medical business has bright prospects as Roper's solutions allow the medical industry to reduce healthcare costs, a desired outcome during fiscal consolidation.

Roper reported fourth quarter EBITDA of $275 million in 2012. Based on this metric, Roper is valued around 11 times annual EBITDA. At these levels the deal multiple at 10.5 times annual EBITDA seems fair, especially in light of synergy possibilities.

While the acquisition-based growth strategy has resulted in growing operations, the balance sheet is still reasonably solid with a modest net debt position. Yet the overall valuation multiples are quite high at over 4 times revenues and 25 times earnings. Furthermore the current dividend yield of 0.5% is not too appealing as well.

While the deal multiples for MHA appear to be fair, I remain on the sidelines, being aware of the excellent long term track record of the firm in creating shareholder value. At these current levels, the risk-reward ratio is not appealing enough for me at the moment.

Source: Roper Industries Boosts Its Medical Business By Acquiring Managed Health Care Associates