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AmSurg offers $7.8 billion to merge with TeamHealth, create huge ambulatory, physician services network

TeamHealth initially rebuffed the deal.

Major for-profit ambulatory surgery operator AmSurg on Tuesday said it has offered $7.8 billion to TeamHealth Holdings to merge the companies.

The deal for TeamHealth, a publicly traded provider of physician services, amounts to $71.47 per share, a 36 percent increase over current TeamHealth stock.

If accepted, AmSurg and TeamHealth would both own a 50 percent stake in the company, which would jointly manage 1,200 facilities and employ more than 20,000 clinicians.

"TeamHealth shareholders will receive immediate cash value equivalent to 22 percent of its market capitalization, and share equally in our combined company's upside," AmSurg CEO Christopher Holden said in the announcement.

[Also: Tracking 2015 mergers and acquisitions]

Holden said the company privately made the offer to TeamHealth in September, but it was rebuffed, leading the AmSurg to take the proposal public to garner shareholder approval.

Holden, in a letter to Team Health's board, expressed dismay that the deal was not initially approved.

"We are disappointed to learn that you chose not to engage with us based on what appears to be a very cursory analysis of our specific proposal and key deal terms," he wrote in the October 12 letter. "Our goal here is to ask you to reconsider your position with full appreciation of solutions available to address your immediate concerns."

AmSurg's proposes merging the companies and rebranding under the TeamHealth name. Holden, however, would take over as CEO of the merged company.

"AmSurg and TeamHealth together will become the most comprehensive provider of outsourced clinical services to health systems, and will create a platform for unprecedented growth in the sector," he said. Together, we will hold leading positions in several industry verticals: ambulatory surgery, anesthesia, emergency services, hospitalists, radiology and neonatology."

Shares of TeamHealth jumped more than 10 percent in early trading on Tuesday, hovering above $57 a share.

 

Here's the full text of Holden's letter to the TeamHealth board:

October 12, 2015

Board of Directors
Team Health Holdings, Inc.
265 Brookview Centre Way, Ste. 400
Knoxville, TN 37919
c/o Lynn Massingale, Chairman

Dear Members of the Board:

We appreciated the opportunity to meet with Dr. Lynn Massingale on September 30, 2015, to discuss our bold vision for the potential combination of our two companies. Dr. Massingale characterized our presentation as both "thoughtful and thought-filled." We left the meeting optimistic that our proposal would be given robust consideration with adequate resources and expertise. Instead, we are disappointed to learn that you chose not to engage with us based on what appears to be a very cursory analysis of our specific proposal and key deal terms. Our goal here is to ask you to reconsider your position with full appreciation of solutions available to address your immediate concerns.

We are mindful that TeamHealth is nearing the completion of its acquisition of IPC. We recognize that your initial reaction to our proposal reflects caution and conservatism flowing from that pending transaction. While we appreciate that timing is a reasonable issue here, the question is not "why now?" but rather "why wait?". We want to reiterate that we are fully supportive of that transaction, and the combination of AmSurg and TeamHealth would not prevent or delay its closing but in fact, further ensure its success. We have every confidence in TeamHealth's ability to integrate IPC. More importantly, as I relayed to Dr. Massingale and Mike Snow, we believe we have solutions and specific integration experience and success that more than adequately address your short term fears and concerns. We also believe you have access to the resources and experts necessary to simultaneously vet this proposal. The magnitude of this opportunity far outweighs any manageable integration risk. In addition, if you were not to engage with us now in a collaborative way, it could possibly sub-optimize the capital structure of a combination with AmSurg in the future - or worse - result in the loss of this opportunity completely. This is a bold vision that requires bold leadership from both Boards. Now is the time.

We believe our vision is catalytic and transformational, not only for our respective companies, but also to the physician services sector. Our specific proposal reflects that as well. We're in it together 50-50 and neither one of us is truly "selling." We view it as a true partnership with a shared vision and the opportunity for our shareholders to participate equally in the value created. We are confident that TeamHealth is the ideal partner with industry leading physician sub-specialties and deep health system relationships that complement ours. We share the same strong and differentiating commitment to quality of care and cultural commitment to working with physicians. We have a unique opportunity to give physicians a meaningful voice in the consolidation of healthcare. Together, we would embark on a strategy to build the most comprehensive provider of outsourced clinical services. We would also be better positioned for the future and to be the trusted partner to health systems and payers in coordinating care and reducing cost across the healthcare system. Ultimately, we believe our health system clients, payers and physicians will be highly supportive of our combination as they share the same vision we do. The combination of TeamHealth and AmSurg is compelling strategically and financially, and our Board of Directors and management team are committed to working with you to pursue a merger of our two companies.

As you know, we have fully integrated the Sheridan acquisition successfully. The financial performance of AmSurg since closing has exceeded our initial public guidance on every major metric. Additionally, we have achieved these results without disruption to the organizations of either legacy company. We believe that experience, along with the overall size and diversification of our combined companies, can add tremendous value to the IPC integration and help de-risk the execution to TeamHealth shareholders. Engaging now also gives us the opportunity to further enhance shareholder value by optimizing the financing packages for the AmSurg/TeamHealth and TeamHealth/IPC transactions to minimize unnecessary, but meaningful transaction and financing expenses of more than $100mm. By leveraging these financing synergies, the combined company is better positioned for growth and infrastructure investments. In order to reduce potential breakage costs for debt incurred by TeamHealth to finance the IPC Acquisition (which would likely need to be refinanced in the event of an AmSurg/TeamHealth business combination) and to avoid potential disclosure issues regarding negotiations for an AmSurg/TeamHealth business combination in connection with marketing the new TeamHealth debt, we have engaged in discussions with J. P. Morgan Securities LLC about arranging replacement debt financing for TeamHealth and J.P. Morgan has issued to us a "highly confident letter" which is attached as Exhibit A hereto. J.P. Morgan is prepared to discuss with you and any of your other potential financing sources replacement financing on the terms described in the highly confident letter.

We have spent significant time exploring the merits of this potential transaction. We analyzed the relative growth prospects and valuation of the two companies – as well as incremental benefits of combination – and this analysis has solidified our view that AmSurg and TeamHealth are ideal partners. Our Board of Directors is fully supportive of this proposal. We are also very confident that our respective shareholders will be highly supportive of a merger as outlined in this letter--particularly given the substantial shareholder overlap between our two companies.

Taking all of these factors into account, we are proposing a merger that reflects our respective strategic and financial contributions to create the best in class provider of outsourced clinical services.

1. Merger Terms: A stock-for-stock merger at an exchange ratio of 0.768x, which implies a pro forma ownership split of 50%/50% and which would enable both companies' shareholders to share in the upside of the combined business as equal partners. Additionally, TeamHealth shareholders would receive cash consideration equal to $11.49 per share, which is approximately 22% of TeamHealth's current market capitalization. This proposal implies a current value of $74.85 per share and a premium of 42% based on closing prices on Oct. 9, 2015. While we recognize the equity markets have been turbulent, we believe this offer, at a value greater than TeamHealth's all-time high, represents a compelling opportunity for all of our shareholders. Further, though TeamHealth has experienced a recent decline in its share price--even since our face to face meeting on September 30th -- we are proposing the same economic terms we proposed in that meeting. Simply put, this proposal is in no way intended to be "opportunistic" relative to short-term stock price movements.

At the average of current peer trading multiples and with $200mm of pro forma synergies (which includes the announced $60mm of TeamHealth/IPC synergies), we believe this proposal would result in total value per share to TeamHealth's shareholders of approximately $83.00 (a premium of approximately 57% to TeamHealth's current)--well in excess of the "headline" price. This structure provides your shareholders liquidity and certainty for a significant portion of their current holdings in TeamHealth, while preserving equal participation in the future upside of the combined company.

2. Strategic Rationale & Key Drivers of Value

  • Pursuing a combination now creates substantial opportunities for combined company
  • Control the combined company's position in a consolidating industry
  • Enhance synergies from the IPC deal with synergies from an AmSurg/TeamHealth combination
  • Reduce risks of standalone IPC integration with AmSurg's integration experience from Sheridan
  • Most comprehensive provider of outsourced physician services to health systems
  • Largest national provider of outsourced physician services
  • Industry leading physician sub-specialties across the continuum of care (surgical to medical home)
  • Provide the most robust suite of integrated system solutions to healthcare systems
  • Best positioned to capitalize on trend towards more comprehensive health system relationships
  • Powerful combination with new and expanded opportunities to accelerate growth
  • Breadth and depth of services accelerates cross-sell and new contract wins
  • Broader geographic presence and greater scope of care expands universe of acquisition candidates
  • Move to a "solutions" provider to health systems creates opportunities to expand into new areas
  • Enhance relationships with health insurers in the midst of increasing consolidation
  • Aligned with the future: Best positioned to enable providers transition to value based care
  • Network of over 1,600 hospitals and employ ~20,000 physicians
  • Best positioned to coordinate care and reduce costs to the healthcare system
  • Best partner to help navigate new payment models and provider risk-sharing
  • At the forefront of key fee for value initiatives such as Bundled Payments for Care Initiatives
  • Becomes an "enabling provider" with services delivered across the continuum of care
  • Capabilities to manage patients from hospital to home
  • Value of the hospitalist as care coordinator will only increase
  • Potential to significantly enhance shareholder value with both sides equally sharing in upside
  • Highly compelling strategically
  • New and expanded opportunities accelerating growth
  • Significantly enhanced free cash flow to support future growth
  • Highly attractive risk profile with diversified business offerings
  • Meaningfully accretive to earnings with significant synergies: $200mm+

3. Financing: We do not expect the final terms of a definitive merger agreement to include a financing condition. Our financial advisors, Guggenheim Partners and J.P. Morgan, are highly confident in the ability to finance the proposed combination of AmSurg and TeamHealth, as well as the pending acquisition of IPC (attached as Exhibits A & B). We are eager to work with you to refine the appropriate capital structure for the combined company.

4. Due Diligence: Our proposal is based solely on publicly available information and our own internal management estimates. We appreciate that each party will need to perform due diligence to better appreciate the opportunities and risks of the other and form a view on the potential of the combined business (mutual due diligence). We look forward to working together to develop a due diligence plan that minimizes any disruption to either business and that will not disrupt or delay the pending acquisition of IPC. We are prepared to immediately assign appropriate resources to the due diligence effort and to begin negotiating definitive agreements during the due diligence period. We are confident in our respective abilities to sign definitive agreements within 30 days following the commencement of due diligence.

5. Conditions and Approvals: While the terms of any potential transaction would be set forth in the definitive agreements, we would expect the merger to be subject to customary conditions, including a shareholder vote at both companies as well as obtaining required regulatory approvals.

6. Contract Terms: We would expect that any definitive agreement would contain representations, warranties and covenants, including with respect to deal protections, customary for transactions of this type.

This letter is not intended to create or constitute any legally binding obligation, liability or commitment by us regarding a transaction or any other matter. There will be no legally binding agreement between us regarding a transaction unless and until a definitive agreement is executed.

It is the right time to put our companies together to create maximum, long-term value for shareholders of TeamHealth and AmSurg. We are all well aware of the consolidation that is reshaping the broader healthcare landscape and share the belief that we are at the precipice of consolidation in our sector as well. We are also aware that the combination we propose in this letter is not your only strategic option, nor is it ours. Having said that, we believe it is the right combination for both companies. Moving expeditiously and deliberately would enable us to proactively shape our shared role in this rapidly consolidating environment.

We are very excited by the prospect of combining our two businesses and believe, if presented for consideration, the combination will be extremely attractive to and compelling for the shareholders of both AmSurg and TeamHealth. It is our strong desire to engage with you directly in a constructive transaction dialogue. We believe time is of the essence and the first mover advantage will drive significant incremental value. We look forward to moving expeditiously toward a successful transaction.

Please feel free to contact me with any questions or concerns. I look forward to your response.

Yours truly,

Christopher A. Holden
President and Chief Executive Officer

Twitter: @HenryPowderly