Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Summary

  • IMS Health makes a stellar deal by acquiring Cegedim.
  • A sizable valuation discount and huge synergies improve appeal and send shares higher.
  • Yet the overall valuation is high amidst a leveraged balance sheet, low earnings and a demanding valuation.

IMS Health (NYSE:IMS) announced the acquisition of Cegedim on Wednesday, boosting its information and CRM business in a rather sizable transaction. Despite the very attractive deal, IMS's overall appeal is limited given the high leverage, limited GAAP earnings and premium valuation.

Deal Highlights

IMS Health announced that it intends to acquire parts of Cegedim information solutions and CRM business for $520 million in an all-cash deal.

Cegedim is a technology and service company focused on the healthcare industry. Included in the deal are the CRM solutions, which help life sciences clients in 80 countries to drive sales effectiveness, optimize marketing programs and mitigate regulatory and compliance risks. The deal is anticipated to close at the start of 2015.

Strategic And Financial Rationale

Key in Cegedim's offerings is the OneKey Reference Database, providing insights for 13.7 million healthcare professionals to be used for primary market research.

The business posted revenues of $573 million back in 2013, reporting adjusted EBITDA of $86 million. The deal tag values Cegedim at 0.9 times sales and 6.0 times adjusted EBITDA, which appear to be appealing valuation multiples. IMS Health anticipates to save annual costs of roughly $50 million in three years following the deal closure. Of course, more modest synergies are expected to be realized until this point of time.

With the deal, IMS will add 4,500 workers with information and technology skills in software development, data warehousing and mobile applications, among others. Both companies are very complementary to each other, offering similar services in the same industry, although Cegedim appears to have very strong technological capabilities. As such, the integration of both companies should provide IMS Health extensive cost savings, which is reflected in the rather sizable synergy estimates in relation to Cegedim's annual revenues.

Valuing IMS Health

Note that IMS has only been a public company since April of this year following its public offering. Shares were sold at $20 per share, but have traded in a relatively narrow $23-$25 price range ever since.

For 2013, IMS Health posted revenues of $2.54 billion, which was up 4.1% on the year before. The company posted net earnings of just $82 million as it paid $332 million in interest payments on nearly $5 billion in debt.

Note that the company does hold $730 million in cash and equivalents, making it easy to finance the deal combined with unused borrowing facilities. The company raised little over a billion in the public offering, which will reduce the net debt position following the deal to roughly $4 billion.

At $25 per share, equity in IMS Health is valued at $8.3 billion, which gives the company an enterprise value just north of $12 billion. Before the deal took place, the total enterprise was valued at roughly $11 billion. This valued the operations at 4.3 times annual revenues and 13.3 times EBITDA.

In this light, the paid price of 0.9 times sales and 6 times EBITDA for Cegedim is a true steal!

IMS does not pay a dividend at the moment.

Investors Are Celebrating

Shareholders in IMS are very pleased with the deal, sending shares nearly 8% higher. This implies that the market value of IMS has risen by nearly $600 million on the back of a $550 million deal.

Of course, the reasons are the very appealing multiples. If IMS would pay an EBITDA ratio of 13 times, which is consistent with its own valuation, a deal tag of $1.2 billion would be more appropriate. As a matter of fact, such a "fair" deal tag corresponds to the jump in the market valuation of IMS and the actual money paid for Cegedim.

On top of this is the potential for another $50 million in annual synergies in three years' time, which is very valuable as well.

Final Takeaway

Don't get me wrong, I think IMS Health made a stellar deal with anticipated synergies alone being able to justify the company's price tag. As a matter of fact, a fair valuation of Cegedim based on similar valuation multiples as IMS leads me to believe the present value of synergies could be worth $1.5-$2.0 billion, in my opinion.

Despite the very accretive deal, I remain cautious given the overall valuation of the core business. IMS will operate with roughly $4 billion in debt and report very modest GAAP earnings, which makes the valuation a bit steep. Key things to look forward to in the future are debt refinancing attempts, integration efforts and the general outlook for the business.

I will continue to operate on the sidelines, but will keep a close eye on the progress made in the meantime.

Source: IMS Health - Cegedim Acquisition Is A Steal