AMED - BrightSpring Health Services' Revenue Growth Flags Before IPO

2024-01-18 10:53:49 ET

Summary

• BrightSpring Health Services, Inc. plans to raise $880 million in an IPO.
• The company's revenue growth has slowed significantly over the years.
• The IPO appears to be richly priced on slowing growth, so I'm Neutral [Hold] on the BrightSpring Health Services, Inc. IPO.

BrightSpring Health Services Is Producing Slowing Growth

BrightSpring Health Services, Inc. ( BTSG ) has filed proposed terms to raise $880 million in gross proceeds from the sale of its common stock in an IPO, according to an amended SEC registration statement .

I previously profiled the company's IPO efforts back in November 2021, after which the firm suspended its plan to go public.

BTSG’s revenue growth has slowed significantly over the years and the IPO appears richly priced, so my outlook on it is Neutral [Hold].

What Does BrightSpring Health Do?

BrightSpring provides value-based and fee-for-service home and community healthcare services to high-need and medically complex patients, such as seniors, specialty and behavioral health patients.

Management is headed by president and CEO Jon Rousseau, who has been with the firm since 2016 and was previously an Executive Vice President at Kindred Healthcare.

The company’s primary offerings include:

• Home health and hospice to seniors

• Home-based primary care

• Rehab therapy and nursing

• Neuro and behavioral patient care

• Supportive care

• Pharmacy services.

BrightSpring has received at least $808 million in equity investment from investors, including private equity firm KKR and Walgreens.

Selling, G&A expenses as a percentage of total revenue have varied within a narrow range as revenues have increased, as the figures below indicate:

(Source - SEC.)

The Selling, G&A efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A expense, fell to 0.7x in the most recent reporting period, as shown in the table below:

(Source - SEC.)

What Is BrightSpring’s Market?

Per a 2023 market research report by Grand View Research, the global market for home health services was an estimated $390 billion in 2023 and is expected to reach $667 billion by 2030.

This represents a forecast CAGR of 7.96% from 2024 to 2030.

The main drivers for this expected growth are a growing demand from aging populations due to rising disease conditions and the desire by consumers to receive as much care as possible while remaining in the home.

Also, there's an ongoing need to reduce healthcare costs across the healthcare system in the U.S., and reducing the length of hospital stays is one important aspect of reducing costs and the potential for hospital-acquired infections.

The chart below shows the U.S. Home Healthcare Market’s historical and projected future growth trajectory from 2020 through 2030:

Major competitive or other industry participants include:

Health Provider services:

• Amedisys

• Encompass Health

• LHC Group

• Addus HomeCare.

Pharmacy services:

• Coram CVS

• Accredo Health Group

• Optum Specialty

• Option Care Health

• Omnicare

• Others.

BrightSpring’s Recent Financial Results

The company’s recent financial results can be summarized as follows:

• Increasing top line revenue but at a lower growth rate than in prior years

• Growing gross profit but decreasing gross margin

• Reduced operating profit and margin

• Fluctuating cash flow from operations.

Below are relevant financial results derived from the firm’s registration statement:

(Source: SEC.)

As of September 30, 2023, BrightSpring had $11.6 million in cash and $4.8 billion in total liabilities.

Free cash flow during the twelve months ended September 30, 2023, was negative ($121.6 million).

BrightSpring’s IPO Plan

BTSG intends to sell approximately 53.3 million shares of common stock at a proposed midpoint price of $16.50 per share for gross proceeds of approximately $880 million, not including the sale of customary underwriter options.

No existing or potentially new shareholders have indicated an interest in purchasing shares at the IPO price.

Immediately after the offering, the company will still be controlled by its two primary investors, private equity firm KKR and Walgreens Boots Alliance.

In a separate prospectus, the company will offer 8 million Tangible Equity Units, which it says will be comprised of the following:

(1) a prepaid stock purchase contract issued by us, which we refer to as a purchase contract, and (2) a senior amortizing note issued by us, which we refer to as an amortizing note. Unless settled earlier at the holder’s option or at our option, each purchase contract will, subject to postponement in certain limited circumstances, automatically settle on February 1, 2027, and we will deliver a specified number of shares of our common stock per purchase contract based upon applicable settlement rates and the market value of our common stock.

(Source - SEC.)

The company’s enterprise value at IPO (excluding underwriter options) will approximate $5.1 billion.

The float to outstanding shares ratio (excluding underwriter options) will be approximately 31.15%.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:

We intend to use proceeds from this offering and the concurrent offering of the Units to repay all indebtedness outstanding under the Second Lien Facility, all indebtedness outstanding under the Revolving Credit Facility, and $652.0 million outstanding aggregate amount under the First Lien Facility, and to pay termination fees of $22.7 million to the Managers in connection with the termination of the Monitoring Agreement, with any remainder to be used for general corporate purposes.

(Source - SEC.)

Management’s presentation of the company roadshow is not available.

Regarding legal proceedings, the firm recently settled a matter for $115.0 million relating to the previous allegations of PharMerica violating the Anti-Kickback Statute and the False Claims Act, without admitting liability.

Listed underwriters of the IPO are Goldman Sachs, KKR, Jefferies, Morgan Stanley and numerous other investment banks.

Valuation Metrics

Below is a table of the firm’s relevant capitalization and valuation metrics at IPO:

(Source - SEC.)

BrightSpring’s Growth Is Slowing

BrightSpring is again seeking public market capital to pay down its debt and for working capital purposes after trying to go public in late 2021.

The firm’s financials have shown higher top line revenue but at a lower rate of growth than in prior years (per its 2021 IPO filing), increasing gross profit but decreasing gross margin, lower operating profit, and margin and variable cash flow from operations.

Free cash flow ("FCF") for the twelve months ended September 30, 2023, was negative ($121.6 million). This has worsened materially from the firm’s previous IPO filing in 2021.

Selling, G&A expenses as a percentage of total revenue have remained stable as revenue has grown, and its Selling, G&A efficiency multiple fell to 0.7x in the most recent reporting period.

The firm currently plans to pay no dividends on its capital stock and anticipates that it will retain any future earnings for reinvestment back into the company's growth initiatives and working capital requirements.

BTSG’s recent capital spending history indicates it has spent heavily on capital expenditures despite generating negative operating cash flow.

The market opportunity for providing home health services is large and growing at a moderate rate of growth as the U.S. population ages and patients seek to receive more health services from their homes.

Risks to the company’s outlook as a public company include the difficulty in obtaining enough trained personnel, changing government regulations and reimbursement policies, competitor vertical integrations and low barriers to entry in some states for its provider services segment.

Also, post-IPO, the firm will still have a material debt load of $3.5 billion.

Management is seeking an Enterprise Value / Revenue multiple of 0.61x and an EV/EBITDA multiple of 49.78x.

Compared to competitor Amedisys ( AMED )’s forward EV/EBITDA multiple of around 14.5x, BTSG is asking investors to pay 3x the valuation of AMED.

While BTSG is admittedly growing revenue at a higher rate of growth than AMED’s anemic 0.32% [TTM], BTSG’s revenue growth rate is slowing quickly from previous years, indicating a downward trend.

Given its slowing growth, high valuation expectations and heavy debt load, my outlook on BrightSpring Health Services, Inc.’s IPO is Neutral [Hold].

Expected IPO Pricing Date: January 25, 2024.

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