Canaccord Explains Why Envision-Amsurg Deal Lacked Cash Component

The merger between Envision Healthcare Holdings Inc EVHC and Amsurg Corp AMSG was structured as an all-stock deal under which 0.334 AmSurg share was offered for each share of Envision.

Canaccord Genuity explained why the deal didn't contain a cash compent, "While we were disappointed with the implied EVHC share price of $25.89 (at time of the announcement), we suspect that sensitivity on ownership percentages between AMSG and EVHC combined with desire to keep post-deal leverage to a minimum were the key factors on determining the ratio and omission of a cash component," analyst Richard Close wrote in a note.

Under the current structure, Envision shareholders own 53 percent of the combined company, while the remaining 43 percent owned by AmSurg shareholders with post deal leverage of 4.2x.

"We suspect that a higher ratio may have created sensitivity that EVHC was getting a larger percentage of the combined company and that adding a cash component would have increased post-deal leverage," Close highlighted.

The analyst said Envision merged with AmSurg mainly due to AMSG's Sheridan strength in anesthesia (about $1.1 billion in last twelve months, or LTM) versus Envision's (about $230 million LTM) anesthesia business.

"While EVHC could have grown anesthesia via tuck-in acquisitions and new contracts, an AMSG combination was viewed as a better option. More RFPs seeking 4-5 service lines, which the combined company will now be able to offer, was called out as a reason to merge," Close noted.

In line with market chatter, the analyst also believes the deal makes more sense from AmSurg's perspective compared to Envision, at least in the near-term. However, Close believes that over the long-term "the creation of a dominant provider in clinical outsourced and outpatient services should be attractive as more health systems and payers align with national providers that can deliver a full suite of clinical services."

Close maintained his Buy rating and $32 price target on Envision on the long-term growth opportunity.