You’re reading Value Add’s weekly briefing, the leading newsletter for the operating side of private equity. Here’s what you need to know this week, from insights for PE-backed executives and portco news to recent buyouts and investment trends.

Insights

Chart of the Week: The sector with the most PE exits in 2023? Technology. The sector with the largest decline in exits? Also technology… In our Private Equity Exits Report we examine exit trends across sectors and why PE firms are delaying exits – and holding on to technology companies in particular – for longer periods of time. (Read More) 

More Insights

• PE Ownership Bears Some Blame for the Healthcare Cyberattack Crisis (Read)
• The Midmarket’s People Problem (Read)
• Private Equity Case Study: Catalent (Read)
• Operations Are at the Core of Edison Partners’ Energy AI Deal (Read)
• Europe Private Equity Report 2024 (Read)

Spotlight

Dissolving an unhappy marriage. New Mountain Capital and TCP-ASC, an investment vehicle jointly held by Towerbrook Capital Partners and Ascension Health Alliance, have been the two largest shareholders in R1 RCM, a healthcare revenue cycle management company, since the company was formed in 2017. In February, New Mountain owns a 32.4% stake, while TCP-ASC owns a 29.6% stake. As of 31 July, Towerbrook's stake has jumped to 35.7%.

In February, both private equity firms were considering an all-cash buyout at $13.75 per share, or $5.8 billion total, to acquire the remaining outstanding shares in the companies. Shareholders immediately came out against the acquisition, arguing that $5.8 billion undervalued the company. In March, R1 RCM told the two firms to halt their buyout discussions. By May, New Mountain reversed the tide by proclaiming that it would only pursue a joint bid with Towerbrook. 

But that bid never came to fruition. The following month, it was reported that the two firms had failed to reach an agreement for the joint venture, and stock prices fell by 9.2% in response. For a while, it looked like New Mountain Capital was going to go it alone, putting in an even lower bid of $13.25 per share, or $5.58 billion, all-cash.

That was July. But last week, Towerbrook came out victorious, clinching the asset alongside co-investor CD&R (Clayton, Dubilier & Rice) for $8.9 billion, with a mix of both debt and equity. This values R1 RCM at $14.30 per share, an 11% premium from its closing price on 31 July, and a 29% premium over the closing price that existed before New Mountain’s take-private hopes went public.

The proposal has been unanimously approved by the special committee that ordered New Mountain and Towerbrook to halt their buyout discussions in March – that approval, though, has already sparked a lawsuit from shareholders against the board for breach of fiduciary duty.

The problem child. For all the drama and back-and-forth, one would expect R1 RCM to be a jewel in both managers’ portfolios. In reality, the firm has a years-long history of shaky revenue and legal issues. 

First, the company’s stock price took a major hit at the end of 2022, as poor profits and allegations of securities fraud spooked investors. The firm immediately replaced its CCO and CFO in January 2023, leading to a slight recovery in stock price, though it still has not returned to its 2021 high. 

The firm has also been accused of revenue manipulation by an activist short-seller, leading to yet another legal investigation at the end of last year. Around the same time, TCP-ASC had to shoulder the brunt of a $45.4 million payout over another lawsuit alleging a breach of fiduciary duties in regard to recapitalization. New Mountain Capital only paid $2 million of the $45.4 million sum, while the R1 RCM board paid $3.6 million.

There is also the issue of cybersecurity. It’s no secret that healthcare is one of the most vulnerable industries to cyberattacks – and, as our recent article reveals, PE ownership has some culpability in the cyberattack crisis for pushing independent offices onto platforms like R1 RCM. 

R1 RCM’s major data breach in March has rumors of a class action lawsuit swirling. Additionally, the cyberattack on direct competitor Change Healthcare negatively impacted R1 RCM’s own revenue and adjusted EBITDA by $9.5 million for Q1 2024. Keybanc then downgraded the stock in April.

Room for improvement. However, there are still major tailwinds for the health tech sector that likely influenced both parties’ zeal for the take-private. 

For example, software companies tend to outperform other healthcare sector companies during economic downturns due to their more predictable revenue streams. There has also been an uptick in the need for RCM software, as labor shortages have forced healthcare providers to outsource such functions. The market is currently only at 30% penetration, meaning there’s still room to scale. 

There is also the competitive advantage that R1 RCM has from its multiple acquisitions of its direct competitors. In 2020, for example, it acquired Cerner’s revenue cycle business “RevWorks” for $30 million. Then, in 2022, it acquired Cloudmed for $4.1 billion in an all-stock transaction. Finally, this year it acquired Providence-based Acclara for $675 million cash.

Towerbrook Capital Partners declined to comment, while R1 RCM and CD&R did not respond to requests for comment.

Buyout News 

Sixth Street has acquired insurer Enstar in a $5.1 billion take-private. The firm currently holds 4.7% of shares and is offering $338 per share for the insurer, or a 3% discount from the stock’s closing price at the end of the week prior, which sent shares down 6%. Enstar’s “go-shop” period will end on September 2. 

Apollo Global Management also had a take-private last week for US Silica. The Manager paid $15.50 per share in cash, or $1.85 billion total, for the firm, a minerals and logistics company serving the oil and gas industry. The deal represented an 18.7% premium over the stock’s closing price on April 25 ($13.06), the day before the deal was announced.

HPS Investment Partners is buying the regional aircraft leasing segment of Chorus Aviation for $1.9 billion. The deal consists of $814 million in equity and about $1.1 billion in debt and will close at the end of this year. 

Berkshire Partners and Leonard Green and Partners have teamed up to invest in Vital Care, a franchiser of infusion therapy pharmacies. While the financial details of the deal were not disclosed, what is known is that initial investor Linden Capital Partners will stick around for the ride, managing the firm alongside Berkshire, Leonard Green, and the family of the firm’s founder.