Envision Healthcare Holdings (EVHC) made its public debut on Wednesday, August the 14th. Shares of the physician staffing company ended their first day with gains of 9.3% at $25.15 per share.
The public offering was a success and well timed ahead of the introduction of "Obamacare" next year. Yet I remain cautious on the back of a high valuation and leveraged balance sheet.
The Public Offering
Envision Healthcare Holdings is a provider of physician-led outsourced medical services in the US. The company has over 20,000 affiliated clinicians in its EmCare unit. Envision furthermore operates a large transportation unit for medical care with its AMR unit.
Envision Healthcare sold 42.0 million shares for $23 apiece, thereby raising $966 million in gross proceeds. All shares will be sold by the company with no shares being offered by selling shareholders.
The public offering values the equity of the firm at $4.00 billion. The offering took place at the high end of the preliminary $20-$23 offer range. Some 24% of the total shares were offered in the public offering. At Thursday's closing price of $25.50 per share, the firm is valued around $4.44 billion.
Besides pricing shares at the high end of the preliminary offering range, Envision upped the size of the offering by 20% to 42 million shares.
The major banks that brought the company public were Goldman Sachs, Barclays, Bank of America/Merrill Lynch, Citigroup, Credit Suisse, Morgan Stanley and UBS, among others.
Envision operates under its EmCare and AMR brands. The company offers physician services and other medical services including emergency anesthesiology, hospital care, radiology and surgery.
EmCare generates almost two thirds of total revenues and manages staffing of emergency services in some 400 hospitals. The unit is the most profitable and most interesting part of the business. The Medical Response unit generates little over a third of total revenues by providing medical transportation.
Envision generated gross revenues of $5.83 billion for the year of 2012. Factoring in the $2.53 billion provision for uncompensated care, and net revenues totaled $3.30 billion. Net earnings came in at $41.2 million after paying out $182.7 million in interest expenses on its sizable debt position.
The company continues to show steady growth as second quarter net revenues rose to $899 million, implying an annual run rate of $3.6 billion. Net earnings for the quarter totaled $9.6 million.
Prior to the public offering, Envision operates with $37.0 million in cash and equivalents. The company operates with a total debt position of $2.72 billion for a net cash position of $2.69 billion.
The sizable gross proceeds of $966 million resulting from the public offering are used to bring leverage down towards a net debt position of $1.8 billion.
Specifically, Envision will redeem $450 million of PIK notes which carry a 9.25% interest rate. Note that Envision pays an effective interest rate of around 7.5% on its total debt position. Assuming statutory tax rates, the resulting deleveraging from the public offering could boost net earnings by some $50 million per year.
Operating assets of the firm are valued around 1.4 times annual revenues and at roughly 45 times annual earnings following the deleveraging of the balance sheet after the public offering.
As noted above, the offering of Envision Healthcare has been a success. Shares were offered at the high end of the preliminary offering range and ended their opening day with gains of 9.3%. At Thursday's close of $25.50, shares are trading some 19% above the midpoint of the preliminary offering range.
Envision is growing its operations at a solid rate, as annualized revenues came in around $3.6 billion in the second quarter, showing solid growth. The future continues to look bright as more people will be covered for health insurance under the Affordable Care Act, while it should help to cut costs for doubtful receivables.
While the immediate prospects look good I think the current valuation is a bit on the high side. Deleveraging of the balance sheet will make a meaningful impact on earnings given the high interest rates which Envision pays, and the Affordable Care Act should improve the top and bottom line even further.
At a current net profit rate of $50 million per annum, deleveraging could add another $50 to $100 million in after tax earnings, while the exact benefit from increased revenues and lower costs under the Affordable care Act are yet to be seen. Even then, generating net profits of $250 million per annum seems challenging for 2014 and the years ahead.
At a current valuation of $4.5 billion, or 18 times earnings in this optimistic future scenario, shares offer little appeal to me especially considering the leveraged balance sheet.
Therefore I remain extremely cautious on Envision's prospects and I will not contemplate making an investment in the firm.