Every week I’ve been including a quick tidbits part to the THCB Reader, our weekly publication that summarizes the very best of THCB that week (Enroll right here!). Then I had the brainwave so as to add them to the weblog. They’re brief and often not too candy! –Matthew Holt
For my well being care tidbits this week, it’s time to delve into the non-public fairness companies’ shopping for and promoting of Athenahealth. That’s in fact the follow administration/EMR agency purchased by non-public fairness firms led by Elliot Capital Administration–they of the Israeli spy company soiled methods division–for roughly $6.5bn in 2018. Many (together with me) have puzzled how, given it was already doing about $1bn a yr in income then, Athenahealth could possibly be bought for $17bn three years later. In any case it’s hardly more likely to have tripled its income in a mature market! This remark by “Debtor 23” on @histalk may be very instructive:
“Elliott did fairly a bit higher than 3x on its funding. The unique deal was funded with about $4.8B of debt and $1B of fairness from the hedge fund sponsors. Add within the acquisition price of Centricity (name it $500M of fairness, $500M of debt) and the fairness traders are all-in with $1.5B of fairness and $5.3B of debt. They bought off some belongings for a complete of ~$600M in money, so internet fairness in play is $900M. They turned that fairness into $11.7B (assuming no interim debt pay down), which is a 13x return. 13x feels ridiculous….however….when you’d invested that very same levered-up $6.8B within the Nasdaq (QQQ) on the identical timeline (Elliott started shopping for ATHN in spring 2017)…you could possibly promote right this moment for $18.1B. Absurd as this complete deal sounds, it has truly underperformed the market. This story is extra about tech a number of growth/bubble broadly than it’s about bettering administration or working the enterprise.”
A lot like Renaissance and different hedge funds that depend on leverage, primarily Elliott leveraged Athenahealth up with debt to the tune of 80% of its worth. So after slashing and burning R&D, promoting belongings (just like the HQ which they apparently bought $500m for) they most likely bought prices down & earnings manner up. When it was public below CEO Jonathan Bush, Athenahealth by no means tried to be that worthwhile. It was all the time fixated on the subsequent large factor (the final one was constructing the longer term state inpatient EMR with Toledo & utilizing the BIDMC tech it purchased from John Halamka). That’s one cause its PE ratio was 100+.
So if Elliott can get some sucker to pay up and manages to show $1bn into $13bn, how do the subsequent larger fools–H&F and Bain Capital–do it? Effectively they should layer Athenahealth up with much more debt (as cash is at the moment so low cost) and hold producing sufficient money to pay the debt. In fact at that worth and with this mature a promote it’s going to be tremendous laborious to develop the corporate sufficient to justify one other leap in gross sales worth, but it surely is likely to be doable to service and even pay down a number of the debt and take it for an IPO for a few billion extra if the market stays nutso. So if H&F and Bain Capital mainly shrink their fairness portion right down to $1-2 billion, and get it to IPO in a yr or so for say $20Bn, they may not less than double or triple their cash. Not fairly 13 x however not horrible.
And if all of it goes flawed and Athenahealth can’t service the debt? Effectively the great thing about leverage and debt is that it attaches to the corporate – to not the PE fund that put it in that place. So all the brand new house owners could have at stake is a fairly small quantity of fairness. In fact if the shit hits the fan and Athenahealth goes bankrupt the staff and clients will not be so completely happy, however who cares about them? (Aside from that hasbeen CEO who bought kicked out!)