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Summary

  • Great Quality Business With A Strong History And Solid Growth Prospects.
  • Unfortunately A Leveraged Buyout Leaves IMS Fairly Highly Leveraged.
  • Sophisticated Sellers Leave Little On The Table.

IMS Health (NYSE:IMS) went public at the start of April. Shares of the global information and technology service company which focuses on the healthcare industry had a strong public debut, increasing 15% on their opening day.

Despite the solid debut, shares offer little appeal in my opinion. The fairly high equity valuation in combination with quite some leverage being employed under the tenure of a private-equity adventure makes it easy for me to pass on this one.

The Public Offering

IMS Health holds a huge collection of healthcare information with a size of 10 pentabytes. This includes 85% of the total prescription sales and 400 million global anonymous patient records. This data, combined with an efficient technology infrastructure allows for better decision making, allowing for better health outcomes for patients at lower costs.

IMS Health sold 65 million shares, thereby raising $1.3 billion in gross proceeds. Actually the company itself sold 52 million shares which thereby raised $1.04 billion while the remainder of shares were offered by selling shareholders.

Initially, bankers and the firm set an initial price range of $18-$21 per share after which a final offering price of $20 has been set.

Some 20% of the total shares outstanding were offered in the public offering. At Tuesday´s closing price of $22.83 per share, the firm is valued at $7.6 billion.

The major banks that brought the company public were J.P. Morgan, Goldman Sachs, Morgan Stanley, Bank of America/Merrill Lynch, Deutsche Bank, Barclays and Wells Fargo.

Valuation

With a presence in over a 100 countries, IMS appears to have a global scale. Still, the company generates nearly half of its revenues within the US. 70 years of investment in data, information and technology makes the company an important partner for everyone involved within healthcare. The importance of the firm within the industry is illustrated by a 99% client retention rate and average relation length of 25 years with its top 25 customers.

For the year of 2013, IMS Health generated revenues of $2.54 billion, up by 4.1% on the year before. The company turned a $42 million loss into a $82 million profit, although high interest expenses limit current profitability. IMS paid $332 million in interest on its $4.96 billion debt position back in 2013, resulting in a relatively high effective rate of 6.6%. This is despite holding roughly $730 million in cash and equivalents. The high leverage employed is of course a direct consequence of the 2010 acquisition by private-equity firm TPG Global which saddled the company with debt.

Luckily the gross proceeds of little above a billion could be used to deleverage the balance sheet by redeeming 12.5% senior notes, among others. Even then, IMS will operate with a net debt position of roughly $3.4 billion which is manageable but still sizable. Note that reported earnings could easily double on the back of the deleveraging with the IPO proceeds.

Investment Thesis

As noted above, the offering of IMS Health was a modest success. The company priced the offering at $20 per share which was 2.6% above the midpoint of the preliminary offering range. The solid opening day returns and consolidation ever since left shares trading some 17.1% above the midpoint of the preliminary offering range based on Tuesday´s close.

For the future of course big data is an opportunity, but it could also invite competition and result in privacy-related issues or concerns. More immediate drawbacks from the offering is the fairly high leverage being employed despite the commitment to reduce leverage by nearly a billion with the IPO proceeds, and the lack of dividends.

I remain on the sidelines. Even when leverage is significantly reduced the valuation for the equity remains high despite the reliable cash flows and solid growth prospects.

Source: IMS Health - IPO Is Exit Opportunity For Sophisticated Sellers