The markets gave a thumbs up to Firstsource Solutions Ltd’s acquisition of MedAssist Holding Inc., a provider of revenue cycle management services for the health-care industry in the US.
The deal is pricey at 12.5 times estimated earnings before interest, tax, depreciation and amortization (Ebitda) for the year till December, but the markets seem to be betting on Firstsource’s good track record at managing acquisitions in the past. But, it needs to be mentioned here that while the company has made six acquisitions in the past, the biggest among them was worth $37 million (about Rs152 crore at current rates). The $330 million acquisition of MedAssist is quite a leap from a scale perspective. Besides, Firstsource, which is set to grow by 50% this year, is trading at an enterprise value/Ebitda multiple of about 14 times. MedAssist has been growing at much lower rates of 7-10%.
Analysts say the key for the acquisition to be successful is that the acquired company’s growth rates pick up considerably. The company is expected to report an Ebitda of $26.5 million this calendar year. But, the annual interest cost required to fund the acquisition could be between $22 million and $24.5 million. This is based on the debt of $275 million, FirstSource would be raising to fund the deal which is priced at Libor+250-350 basis points (that is, 8-9%). After deducting tax (which is at a high level of more than 30% in the US), the acquisition would barely leave anything for the shareholder—Firstsource. It is clear from the above numbers that the Ebitda generated by MedAssist should increase considerably from current levels for the acquisition to make sense.
Firstsource believes its overall growth would get enhanced with the acquisition. MedAssist caters to healthcare providers—which fits well with Firstsource—who are already present on the payer side of the market. It has more than 1,000 clients ranging from hospitals, large physician groups and alternative site providers.
Firstsource management points out it could tap these customers to cross-sellservices MedAssist does not already provide. Besides, the management points out, the addressable market in the health-care space is huge,so growth should not be a problem.
Since most of the acquired company’s revenues come from onsite/onshore work, a large proportion of revenues would be insulated from forex fluctuations. MedAssist also enjoys healthy Ebitda margins of 22-24%. But, as pointed out above, high interest cost and high tax rates in the US mean that profit must grow to a much higher level for meaningful contributions from the acquisition.
Shares of Exide Industries gained nearly 5% after the company announced it would raise Rs150 crore through a rights issue. Analysts see this as a move to build high cash reserves in order to go for big acquisitions in developed markets.
The company is generating sufficient cash to meet its capital expenditure requirements. Cash generated from operations stood at nearly Rs190 crore in the year till March 2007. And the way earnings are growing, cash generation is set to grow further. This would easily take care of Exide’s plans to invest Rs450 crore between fiscal years 2007-08 and 2009-10.
What’s surprising, however, is the route Exide has chosen to adopt for its fund-raising. The funds could have been raised through a qualified institutional placement or a foreign currency convertible issue in a much shorter time frame—especially since its equity is being diluted by less than 7%, and the issue size is just Rs150 crore ($37 million). Demand for Exide paper would hardly be an issue, considering that the company is enjoying strong demand and pricing power. The industrial segment, buoyed by high growth in the telecom industry, and the replacement market for its automobile batteries have been driving growth lately.
These segments operate on much higher margins compared to OEM (original equipment manufacturers) sales to auto manufacturers. Analysts say that the strong growth in auto sales in the past few years is now leading to strong demand from the replacement market.
Helped by these factors, Exide reported an 84% jump in profit before tax last quarter. Even after adjusting for exceptional items, growth was impressive lower at 71%. The company’s high capital expenditure, coupled with likely acquisitions, should lead to the high growth continuing for some time.
Valuations, meanwhile, are not all that high despite the fact the stock has nearly doubled in the past year. Adjusted for the embedded value of Exide’s stake in life insurance company ING Vysya Life Insurance Co. Ltd, the core business trades at just about 13 times estimated fiscal year 2008 earnings.
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