Amsurg - Major Acquisition Of Sheridan Healthcare Offers Little Appeal For Shareholders

Jun. 1.14 | About: Amsurg Corp. (AMSG)

Summary

Amsurg acquires Sheridan Healthcare in a deal which will double its operations.

However the deal is little accretive while leverage will increase significantly.

As such the deal increases short term risk while the upside is limited in my opinion.

Amsurg, the operator of short stay ambulant surgery centers, announced the acquisition of Sheridan Healthcare in a healthcare deal which will double the company's operations.

With relatively little accretion to earnings and a build-up in leverage, I fail to see the great upside of the deal and won't jump on the bandwagon. This is after shares have already risen some 5% over the past two trading days.

The Deal Highlights

Amsurg (NASDAQ:AMSG) announced that it has reached an agreement to acquire privately-held Sheridan Healthcare.

Under terms of the agreement, Amsurg will pay $2.35 billion in a cash and stock transaction which is expected to close in the third quarter of this year, assuming regulatory approval. Amsurg has received a financing commitment from Citigroup (NYSE:C) and will issue equity with a value of roughly $615 million to finance the deal.

Sheridan Healthcare is a national provider of multi-specialty outsourced physician services to hospitals, ambulatory surgery centers and other healthcare businesses.

The company shows much greater organic growth, being accretive to the pro-forma growth potential of the firm. Adjusted earnings per share are expected to increase by 15% in 2015 following the deal.

Implications Of The Deal

The tie-up will create a company with roughly twice the size of the current Amsurg with operations in 38 states while having relationships with more than 4,600 physicians. Following the deal the new Amsurg will have much better geographic, business and payer diversity in a large, growing yet still fragmented market.

Enlarged scale is important allowing the firm to address innovation as well as healthcare changes.

In an investor presentation, Amsurg outlined the financial impact of the transaction. Both Amsurg as well as Sheridan reported revenues of $1.08 billion for he past year. Amsurg reported adjusted EBITDA of $187 million vs. $193 million for Sheridan. While Amsurg is completely focused on ambulatory care, Sheridan relies for 68% of its revenues on anesthesia revenues.

The company appears to be paying a premium at $2.35 billion compared to its own enterprise value which stood around $1.9 billion ahead of the deal. Adjusted earnings per share in 2015 are anticipated to increase by 15% by employing leverage while Sheridan has projected organic growth of 8%-10% in 2014 and 2015, versus 0-2% organic growth expectations for Amsurg.

It it is important to realize that Amsurg will benefit from expected synergies which are seen at $30 million to $40 million in year three following closure of the deal. $10 million of these synergies are related to direct cost savings, while the remainder comes from the revenue side.

Pro-Forma Business

Combined, the businesses will reported revenues of $2.16 billion, while reporting adjusted EBITDA of $380 million. Amsurg posted net earnings of $72 million last year, which given the equal EBITDA profitability, could lead to $150 million in net earnings.

Leverage will increase significantly following the deal to the tune of $2.2 billion-$2.3 billion. The additional incurred debt of around $1.7 billion will increase interest expenses notably. Note that the expected $0.15 per share accretion in 2015's adjusted earnings is equivalent to just $5 million in real money terms.

While the growth profile will improve as a result, leverage will increase to very high levels. The company has already arranged committed financing, although it updated the market that it might access equity markets opportunistically in the coming period in order to reduce its leverage position.

Takeaway For Investors

Overall, investors appear to be pleased with the deal, with shares being up 5% in the two days following the announcement, reflecting a $60 million-$70 million boost to the market valuation.

Amsurg is paying a premium multiple at 12.2 times adjusted EBITDA while Amsurg itself trades at roughly 10 times adjusted EBITDA. Of course, the deal will improve diversification, and the growth profile while the company can further benefit from synergies. The price is of course huge debt and integration risks in the years ahead.

Amsurg's new equity valuation comes in at little above $2.1 billion while earnings per share are seeing just a 7% expected jump following the deal.

I remain on the sidelines being worried about the relatively little accretion and the increase in leverage.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.