In an announcement to the ASX yesterday, Lifehealthcare Group Ltd (ASX: LHC) informed investors that it had entered into an agreement to wholly acquire M4 Healthcare Pty Limited.
The acquisition aims to extend Lifehealthcare's existing presence in the Cardiac Ultrasound market into the growing Point Of Care (POC) Ultrasound market, which is worth an estimated $40 million dollars per annum. The POC market is growing at mid-single digit levels per annum, and today's acquisition will make Lifehealthcare one of the major players in that market.
Here's what you need to know about the agreement:
- Lifehealthcare will pay $9million to acquire M4, with additional earn-out clauses worth up to an extra $0.6m based on earnings growth in the first 12 months
- M4 boasts revenue of $9m per annum, and offers 'gross margin and operating metrics consistent with Lifehealthcare's other capital businesses'
- Acquisition will be immediately Earnings Per Share (EPS) accretive for Lifehealthcare shareholders
- Funded from existing debt facilities; will take gearing to 1.53x on a total equity to net debt ratio (using 2014's pro-forma figures)
- Management indicates there is room for further acquisitions to be made with existing debt
Interestingly, LHC management didn't provide any guidance as to what kind of Price to Earnings multiple the acquisition was being made at. Investment bank UBS was reported in Fairfax media as estimating the price to be around 4-5x Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA), which is an attractive price if true.
UBS analyst Andrew Goodsall, who wrote the report, said he expected the acquisition to add more than 6.9% earnings per share. UBS has recently upgraded its price target for Lifehealthcare from $3.40 to $3.70.
This is an interesting proposition because management at LHC has already forecast 'low-double digit' profit growth for the year; although the acquisition comes late it reinforces the likelihood of hitting this target. With only a few weeks left in the financial year however, I don't think that shareholders can expect a profit upgrade.
If M4 Healthcare proves to be a good acquisition, management's eye for purchases could be a quick way to deliver further profit growth in 2016 and create some form of moat as the company's presence expands – but with the risk of higher debt.
Competitor Paragon Care Ltd. (ASX: PGC) has been following a similar, but more aggressive, strategy of purchases, also using its balance sheet to expand its market share. As a recent listing Lifehealthcare has had less opportunity to go on a buying spree, but the opportunities for further acquisitions are clearly there. I also think it likely that LHC will deliver full-year profits
I believe that Lifehealthcare is very likely to hit UBS' price target of $3.70, however I'm not sure that I can justify purchases at much more than $3-3.20. $3.70 probably represents 'fair' value, and given management's apparent intention to take on more debt and buy more businesses, I would want a little extra discount in return for the risk.
Lifehealthcare still appears a solid proposition however, and I am a happy to hold my shares.
