This week, Experian announced the acquisition of Passport Health Communications , a leader in provider revenue cycle management software (primarily in hospitals) with over 400 million transactions processed using its tools annually. According to Healthcare Informatics, Passport Health was generating $56.4 million of revenue in 2008, the same year Great Hill Partners and Spectrum Equity invested $232 million into the business. According to the Experian press release, the Company is forecasting $121 million for 2013 revenues, a 16.5% CAGR since 2008 that came through a combination of organic growth and acquisitions. Based on the company’s 23% 2013 revenue growth rate, it appears organic growth has recently accelerated and has given Experian the confidence to acquire a business they have been looking at since 2008.
For Experian, the transaction adds a significant scale and capabilities to its existing healthcare revenue cycle management business – which it expects to generate in excess of $75 million revenue in the year ending March 2014. Experian entered healthcare with its 2008 acquisition of SearchAmerica for approximately $90 million (Disclosure: TripleTree served as financial advisor to SearchAmerica in the sale). SearchAmerica provided payment prediction analytics to approximately 200 clients in over 500 hospital facilities at the time of the sale. In June 2011, it acquired capabilities in the physician/clinic market with the acquisition of Medical Present Value, Inc. (MPV) for approximately $185 million. At the time of the deal, Experian stated MPV had over 75,000 provider customers.
The combination of Experian Healthcare and Passport will have nearly $200 million in healthcare revenue (most of it highly recurring) with a 3,000 hospital customer base equivalent to about 45% of the US hospital market. The transaction marks an important shift in Experian’s strategy by bringing “in-house” new capabilities in scheduling, claim processing, payment posting, AR follow-up and patient engagement to give it an end-to-end platform in provider RCM. During the four years following our sale of SearchAmerica to Experian, the Company had previously resisted the temptation to acquire application software targets that would place it directly in the RCM workflow and had instead focused on retaining a position as a content and analyticssolutions company that could grow without risking competitive and channel conflict with complementary RCM vendors. The acquisition of Passport, and the entry into a broader suite of RCM capabilities, meaningfully changes the competitive landscape for Experian and the RCM industry. As an aside, I found it interesting that the Company specifically highlighted Emdeon, LexisNexis (owned by Reed Elsevier) and TransUnion as their chief competitors in provider RCM market in the Q&A portion of the earnings call.
As far as transaction valuation, based on numbers from the Experian press release, the implied 2013 revenue multiple is 7.0x and implied 2014 revenue multiple is 5.9x (based on $145 million of expected revenue). Based on $30 million of 2013 EBIT, the implied acquisition multiple was 28.3x. The Company is forecasting between $39 – $42 million in 2014 EBIT (based on $145 million revenue x “EBIT margins in the high 20s” which I assume to be 27% – 29%) which results in a 20 – 22x 2014 EBIT multiple. As a private company that has made several acquisitions over the last five years, we are quite confident that the EBIT margin is depressed by material levels of goodwill amortization and that EBITDA is likely significantly higher than EBIT. Add to this the data acquisition cost synergies that Experian referenced in its earning call and this likely pencils as a mid-teens forward EBITDA multiple for a company of very nice scale, 84% visibility on 2014 revenue, and 20%+ organic growth rates. Given all of these factors, a mid to high teens EBITDA multiple seems justifiable (even if the headline price looks high).
In our view, this is a great outcome for investors that paid up in 2008 for a high growth asset, but were rewarded with a premium exit valuation today. Experian has now invested over $1 billion on the provider RCM market and should be positioned as a formidable competitor to the EMR vendors and RCM services companies focused on this sector. We will be watching market reactions for additional competitive activity, or looking to see if this is simply an opportunistic move by Experian.
Let us know what you think.