HLTH analysis – 1/11/06
Summary
I would use 350 over Libor as the spread for the $350M HLTH 1.75% convert bonds that have a 6/15/10 put. These are subordinate to the company’s $300M 3.125% convert bonds that have a 9/1/2012 put (I would use 275 for these).
I am comfortable with the credit for the following reasons:
1) At the end of 2005, HLTH will have $420M in cash and $1.9B in shares of its 85% stake in WebMD (WBMD), giving it significant liquidity. HLTH’s only debt are the two convertible securities ($650M). The company completed a stock tender offer for $500M in December 2005, partly because management is confident in its cash position and decided to lever up.
2) HLTH generates mostly recurring revenues, which gives it a steady and predictable cash flow. 57% of sales come from transaction processing where the company earns a fee for each transaction. Another 24% sales is from software license and maintenance, which is also steady.
3) HLTH is expected to generate between $100M and $150M in annual FCF for the next few years.
4) The main risk is that the company has historically made large acquisitions, having spent $70M in 2005, $200M in 2004 and $330M in 2003 on acquisitions. The company has not been able to grow much organically (5% growth) so it may continue to buy companies. HLTH is also on the small side with a $3.3B market cap
Financial Ratios
| A | Baa | Ba | B | ||
| A | BBB | BB | B | hlth | |
| 5 year spread | 70 | 122 | 269 | 345 | |
| EBIT/Interest Coverage | 6.1x | 3.7x | 2.1x | 0.8x |
5.3 |
| EBITDA Interest Coverage | 9.1x | 5.8x | 3.4x | 1.8x |
8.3 |
| Debt/EBITDA | 1.6 | 2.3 | 3.4 | 4.9 |
4.4 |
| Debt/Capital | 42.5 | 48.2 | 62.6 | 74.8 |
30.7 |
HLTH is not rated by the agencies. Its EBITDA/Interest ratio puts the company in the BBB range while its Debt/EBITDA ratio puts it in the B range. Given the company’s positives (steady business model and good liquidity) and negatives (acquisitive, small market cap), I am comfortable with a 350 spread.
Business
HLTH operates four units: WebMD portal (85% owned; 13% of revenues), Emdeon Business Services (57%), Emdeon Practice Services (24%), and Porex (6%).
HLTH spun off a 15% stake in WebMD portal (WBMD) at $15 in September 2005. The stock moved up to the current price of $40, which values HLTH’s stake at $1.9B. WebMD has stable revenues by selling advertising and sponsorships on WebMD.com (for consumers) and Medscape.com (for Physicians). The company generates good, steady cash flow from operations. HLTH has no immediate plans to sell its remaining stake but it could reduce its stake by selling shares to raise cash if needed.
Emdeon Business Services transmits electronic transactions between healthcare payers and physicians, pharmacies, dentists, hospitals and other providers. The company is dominant in the physician market, strong in hospitals and number 2 behind NDC Health in pharmacies. The unit generates revenues by selling transactional services either per transaction or fixed monthly fee. The growth potential is from low penetration from physicians with only 40-50% of physician claims being submitted electronically compared to 100% of pharmacy and 80% of hospitals. This unit generates steady revenues and cash flows.
Emdeon Physician Services develops and markets information systems for healthcare providers. The unit generates revenue from one-time fees for licenses to software modules and recurring fees for maintenance. The software allows physicians to keep record of patients, manage accounts receivables and use Envoy to connect to providers. Sales have been disappointing but HLTH hopes that a new integrated product the connects with outside databases will drive sales in 2006.
Porex is a totally unrelated business that develops plastic components used in healthcare, industrial and consumer applications. This unit is valued at $168M on 7x EBITDA if HLTH decides to divest it.
Takeover risk
HLTH is not likely to be acquired although the situation needs to be monitored. The argument against a takeover is that Chairman Martin Wygod who owns 3% of the shares and has considerable influence on the board, is not open to selling the company. The argument for a takeover is that the stock hasn’t done much so activist shareholders may want to extract value from the company. However, HLTH’s recent $500M stock tender offer in December 2005 has satisfied shareholders in the near term.
For the 1.75% converts, we would only get hurt on a cash takeout over $13 (currently $9.60).