Update (correction re revenue figures) While flying home from LA yesterday, thru the miracle of airplane wifi I got a note from a colleague stating “MES contributed $13.2 million in revenues in the first quarter of 2011. MES had approx. $129 million in revenues for 2010 (a run-rate of approx. $32 million per quarter).
Am I reading this right??” the net is not exactly, but the earnings report does raise. Few questions.
For those not immersed in this tiny little business, Examworks is a rollup of IME firms, companies that contract with independent doctors to do Independent Medical Exams, primarily for workers comp insurers. Among several other acquisitions last year, Examworks bought MES for some $175 million in cash plus $10 million in assumed debt plus 1.4 million shares of Examworks stock (worth about $25 million) for a total of about $210 million .
If their new acquisition generated about forty million for the first three months of 2010, (deal closed 2/28, so the $13 million was for one month) the obvious question is “was it worth $210 million?”
My colleague was referencing yesterday’s earnings release which was followed by a press conference/call last evening. I didn’t hear the call, so don’t know what was said (will see the transcript by the end of the week). As my investment portfolio demonstrates quite convincingly, I’m no Warren Buffett. But I do know a bit about this business, have helped on a few private equity deals, and can operate a calculator with some facility.
MES’ 2010 EBITDA was about $23.4 million. So, Examworks paid a 11x multiple for MES, a rather princely price. Especially given the Q1 revenue figures.
So, if I was on the call – which I was not – I’d want to ask:
How’s that MES deal?
Have you been able to negotiate more favorable rates with your physicians, and if so, how much lower?
What savings are you seeing from synergies? What kind of synergies have you found?
Here’s hoping someone did.
May
11
If Examworks paid $210 mil for MES and MES had EBITDA of $23.4 mil in 2010 then wouldn’t the multiple paid by Examworks be just under 9?
210/23.4 = 8.97
Jeff – thanks for the note.
The key here is what’s GAAP EBITDA and what’s “adjusted” EBITDA. the number you are referencing is “adjusted” EBITDA. EXAM discussed their “adjusted” number in the call – which is fine, but one may want to consider exactly what comprises “adjusted” EBITDA.
From conversations with others more knowledgeable about these matters, here’s some addition insight.
In the earnings call, Examworks said it will quickly cut $2 million in corporate overhead expenses from MES, and many analysts will include that in adjusted EBITDA as well. Those cuts are sometimes easier said than done, so I take a wait-and-see approach before including them. EXAM also said there were an additional $5 million in adjustments that they included in their calculations but that the SEC’s rules wouldn’t allow them to show on the form 8-K/A as adjustments. That makes me a bit wary (as I’ve never heard that explanation before), as did the company’s sidestepping of the question from an analyst about what those other adjustments were, but if you take the company’s word for it and add back those items, you get to $24 million in adjusted EBITDA, or a purchase price of 9x adjusted EBITDA.
If you want to accept their $7 million or so in addition to the other additions (owner’s salary and benefits from last year) than yes, you do get a 9x.
I’d note that even a 9x is pretty rich unless it is for a company with strong growth potential. I’d also note that EXAM has said before that they are going to keep the MES sales force.
Paduda