American Renal Associates Holdings Inc. (NYSE:ARA) priced its 7.5 million share IPO @ $22.00, within the anticipated range ($20-23), raising $165 million in proceeds. The company will have a market capitalization of approximately $678M (assuming the option to purchase additional shares is exercised). Active bookrunners for the offering are BofA Merrill Lynch, Barclays, and Goldman, Sachs & Co. The proceeds of the offering will be used together with borrowings under their first lien credit facility, and cash on hand, to repay in full all outstanding amounts under their second lien credit facility.
ARA, founded 16 years ago, is one of the largest dialysis services provider in the U.S., and has an exclusive focus on a physician partnership model. It operates its clinics exclusively through a JV model, in which it partners with local nephrologists to develop, own and operate dialysis clinics. As of the end of 2015, it had 192 clinics, serving over 13,000 patients, and JV partnerships with 347 local nephrologists.
Since inception, it has grown primarily through de novo clinics with just 56 through acquisitions. The company believes it has significant white space opportunity, with just 347 nephrologists out of 10,000 practicing in the U.S. It believes a significant percentage of these have no ownership interest in the clinics in which they treat patients. It anticipates growth in de novo clinics through both existing and new partners (in which it has opened 64 de novo clinics since 2012, and have an additional 32 signed clinics set to open in the next 12-18 months). It also expects to see continued capacity expansion within existing clinics, as well as potential strategic acquisitions.
The company has grown net revenue at a 16% CAGR from $356 million in 2011 to $653 million in 2015. Adjusted EBITDA over this period has grown at a 12% CAGR from $104 million to $188 million. Since the doctors it partners with on average have a 46% ownership interest, the adjusted EBITDA less NCI (non controlling interest) over the same period grew from $66 million to $114 million. Pro forma, the company will have approximately 16.6 million in cash and $501 million in debt. Leverage has reduced from 6.5x in 2013 to 4.2x pro forma, and its target is 3-4x.
The providers of the majority of dialysis services in the United States operate through a combination of wholly owned subsidiaries and joint ventures. The largest competitor is DaVita HealthCare Partners (NYSE:DVA). ARA believes that nephrologists choose them over its competitors due to its JV structure. Its model creates alignment and drives physician satisfaction.
At the $22 price, AGA is coming at approximately 23.6x ttm P/E and 6.18x ttm EV/adj. EBITDA (10.2x ttm EV/adj EBITDA - NCI). DVA is trading at approx 20x ttm P/E and 9.1x ttm EV/EBITDA. However, ARA is growing at a faster rate, and for an apples-to-apples comparison, the NCI likely should not be subtracted from the multiples.
The company has been well received, and books were described to have been well oversubscribed since early in the week. We would expect the stock to trade on Thursday morning with a decent opening day premium.
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