Bidding war – 20%+ Upside
Andrew Walker from Yet Another Value Blog has recently shared his thoughts on an interesting event-driven opportunity at RCM.
R1 RCM specializes in revenue cycle management services for hospitals and physician groups. The company has recently become a potential bidding war target of its two largest shareholders. These shareholders are large and reputable PE firms – New Mountain Capital (ref. NM), which owns 32% stake, and TowerBrook Capital Partners (ref. TCP), which owns 36%.
In February, NM announced a $13.75/share bid for RCM (versus $12.5/share current price). TCP quickly joined the show and both suitors engaged in preliminary talks for a potential joint takeover.
The situation took an interesting turn this month:
- On July 1, NM announced that it was no longer interested in pursuing the joint proposal with TCP and will instead seek to acquire RCM independently. It also noted that due diligence had been completed, and lowered the takeover bid from $13.75 to $13.25. RCM’s share price is currently below the revised proposal (6% spread is outstanding).
- On July 5, TCP filed a 13D and said it is finalizing a competing proposal for RCM. The potential offer price has not been disclosed yet.
The situation is pretty unique and it’s difficult to say how it might play out. However, what we have here is two major equity holders that clearly recognize RCM’s undervaluation and want to privatize the business, but likely just have divergent views on the company’s strategy, operations, and management going forward. This is also evident from both equity holders revealing their collaboration with different RCM insiders as part of their bids. RCM’s ex-CEO and current director is apparently working with TCP, while another board member is aligned with NM. A bidding war seems to be the most likely path forward.
In a scenario with a few price bumps from both sides, the final acquisition offer could exceed $15/share, implying a 20%+ upside from the current stock price levels.
There is a slight risk that either or both parties might lose interest and walk away from the potential deal, especially since RCM cut its full-year outlook in May following a cyberattack on one of its customers. However, this risk seems minimal given the announcements from both suitors this month, which clearly indicate continued interest in the takeover.
Note: The ‘Ideas Elsewhere’ section is intended to highlight interesting event-driven investment ideas by other authors. These ideas are not my own, and I am simply summarizing them to bring the attention of SSI subscribers. I might not actively follow the developments of these ideas, so there might be limited updates or follow-ups in the comments section.
News has leaked that tower brook is working on a bid. Has anyone done a valuation on rcm and estimate how much it is worth?
The business is in the too hard pile for me, but there’s a pretty good write-up on VIC from November 2023:
https://valueinvestorsclub.com/idea/R1_RCM_INC/3072852711#description
With RCM currently trading at $13.4, just 1% above NM’s $13.25 bid, the downside seems limited, if we believe that NM is not going to walk away.
Besides not sharing the same view on how RCM’s going to be run post-privatization , NM’s decision to go solo might also be driven by their improved conviction on the deal (thus not willing to share upside with others).
It’s interesting that RCM is such a consensus long in the merger arb community and yet it’s trading just a little bit above NM’s $13.25 bid.
With the deal securitized by the community so closely, I am wondering what edge we could have.
“R1 RCM, a health-care technology firm, is considered the most likely candidate for a third-quarter acquisition, according to 10 of the 12 respondents polled from July 8 to July 15. They cited the ongoing bidding war between the firm’s two large shareholders as the main driver.”
“That’s the finding from a Bloomberg News survey of 12 merger-arbitrage and event-driven analysts, brokers and fund managers who said they are especially cautious ahead of the US presidential election in November.”
RCM sets July 31 as final deadline to submit fully financed bids. Some pressure for bidders
https://ir.r1rcm.com/news/news-details/2024/R1-RCM-Special-Committee-Provides-Update-on-Evaluation-of-Strategic-Alternatives/default.aspx
TowerBrook and CD&R will acquire all the outstanding common stock that TowerBrook does not currently own for $14.30 per share
https://ir.r1rcm.com/news/news-details/2024/R1-RCM-to-be-Acquired-by-TowerBrook-and-CDR-for-8.9-Billion/default.aspx
A bidding war still possible? After all, the TowerBrook offer is just 8% above NM’s offer.
NM owns 32% of RCM. Is NM ready to give away its blocking stake for just 8% more than its own offer price (which is presumably far lower than its own assessment of RCM’s intrinsic/potential value, and way below RCM’s highs in 2021).
Yeah, was thinking the same thing. Working through the filings now. How prevalent are “no-shops” ? Does this mean it’s a done deal, or are these just part of the boilerplate stuff ?
Not an expert on this, but I think RCM is subject to a “no-shop” provision, but with a “fiduciary out” clause, allowing the company to consider superior proposals if the special committee determines in good faith that the proposal is more favorable to shareholders and failing to engage with it would breach their fiduciary duties.
thanks. This makes sense. I’m gonna hold on the off chance that NM come over the top. Doesn’t seem that far out of the realm of possibilities.