Allied Healthcare: Looking at past transactions in the sector

I discussed Allied Healthcare a few weeks ago as an interesting investment opportunity.  Other than being cheap on an absolute basis, I mentioned a transaction that took place in January 2011 that gave me confidence that the value was much higher than where the shares are currently trading.

I said:

Acromas, a company looking to consolidate the homecare industry through its Saga subsidiary, recently acquired Nestor Healthcare Group, a competitor of Allied Healthcare, for £124m or £136m including debt.  Nestor generates more than two thirds of its revenue from social care of patients in their home and about a third from primary care of patients.  Three private equity groups own Acromas: CVC Capital Partners, Charterhouse and Permira.  Below is a table comparing the valuation of the buyout based on annualizing the first six months of Nestor’s results in 2010.  The initial offer was made in August 2010.  The deal closed in January 2011 offering an optimal comparison for Allied.

Nestor Healthcare*    AHCI    Implied AHCI Share Price Upside 
Price/Sales      0.8          0.4    $4.54                                      89%
EV/EBITDA   11.5         5      $4.32                                      80%
EBITDA         10.5         8      $3.22                                      34%
P/E                  16          12      $3.20                                      33%
EV/E               18            8     $4.40                                        83%

I did some additional digging, because a recent investor presentation (they don't have it on the website and you have to email investor relations for a copy of the most recent one which is odd and annoying.  They also stopped publishing transcripts of conference calls a few quarters back, so I had to listen to several hours of audio for what could have taken 30 minutes of reading during my research) had this chart in it:

 

So I checked out those companies to see what was up with them. This is what I came up with those who have been involved in fairly recent acquisitions:

Mears (Careforce) is a roll up that started with a company called Careforce in 2007 for £23.8m, but went on to acquire 8 more domestic care companies for a total of £10.6m.  The Careforce segment of Mears did £54.6m in revenue and £3.1m in operating profits for 2008.  The buyout valuation to follow is based on full year 2008 results in order to use a full year of consolidate financial data and uses an implied purchase price of £34.4m.  Careforce only makes up 15% of Mears’ operating profit, so the current market valuation doesn’t reflect the value of the division.  The earnings calculation is derived from operating profit taxed at 35%.

Housing 21 (Claimar) is also a roll up of care providers.  Claimar was a debt laden roll up that was then bought by Housing 21, a non profit for £19.5m with £21m in net debt.  The acquisition was announced mid 2009, and full year 2008 figures are used in the comparison calculation.  The company reported £2.4m in operating profit and £.5 in net profit on £52.6m in revenue.

As you can see, some personal judgment was involved with the calculations so they aren't perfect.  I tried to explain my steps so that you can see I'm not going out of my way to produce overly optimistic takeover valuations.  The Housing 21 valuation is really only good for the P/S ratio, as the company was especially debt laden relative to the others.   If you were to assume Claimar was debt free and operating profit was taxed at 35%, the company would have earned £1.5.  If you still use the same £19.5m purchase price, the company was bought for 13x earnings, which is still higher than where Allied trades without even accounting for the cash on the balance sheet.

Talk to Andrew about AHCI