R1 RCM pushes sales process forward, hiring bankers

Healthcare revenue-cycle technology firm R1 RCM Inc (NASDAQ:RCM) continues to evaluate a potential sale and other strategic options despite news on Monday that the company requested that buyout talks between its two largest shareholders end. Highlighting its efforts to maximize shareholder value, the company hired financial and legal advisors.

Earlier in the month, the board of R1 RCM formed a special committee to evaluate strategic alternatives after 32% shareholder New Mountain Capital offered to acquire the company for $13.75 per share. The offer, conveyed in late January, also came with a request by the private equity firm for R1 to waive standstill restrictions. At that time, R1 did not act on the waiver request but directed New Mountain to hold discussions with 36% shareholder TCP-ASC. The two significant holders engaged in constructive talks on a potential joint takeover agreement, and TCP-ASC requested waivers related to antitakeover statutes. On Monday, however, R1's special committee said any talks between New Mountain Capital and TCP-ASC about a potential takeover "must cease at this time." In addition, the committee did not approve the requested waivers.

Monday, lost in the shuffle, was news that the special committee hired financial advisors Qatalyst Partners and Barclays and legal counsel Skadden, Arps, Slate, Meagher&Flom LLP. The hiring of the top-flight M&A advisory team suggests the story is far from over.

Citi analysts tend to agree. The firm upgraded shares of R1 RCM to Buy on Monday evening, saying a takeover is still the most likely scenario. The analysts, which maintained a $16 price target on the shares, said an "acquisition in the mid-to-high teens is still the most likely scenario." They added that news that the special committee asked the two large holders to cease discussions is a "favorable development", suggesting a higher bid will be needed to get the deal done. According to the analysts, either the TCP-ASC/ New Mountain group must raise their bid, or a new P/E firm could enter the fray.

"In our view, a mid-to-high-teens share price still presents a compelling investment opportunity for a private equity firm," the analyst said. "With relatively conservative assumptions, our LBO analysis yields a ~20%+ 5-year IRR if R1 was taken out for $16 (~12x our 2025 adj. EBITDA estimate)," the Citi analysts added.

That said, the analyst warned that if a deal doesn't come to fruition, the stock could fall back to the $11.50-$12 per share range.