Diagnosing Orion Health’s buyout deal
Orion Health shareholders will overwhelmingly approve a deal that will see UK-based HgCapital take control of the only profitable division of the healthcare software maker, and a stake in its remaining business.
At the company’s annual meeting in Auckland on Friday, it was revealed that proxy votes were 99 per cent in favour of a resolution in support of the deal, and an associated resolution for a share buyback. Shareholders spoken to by the
Herald were universally angry and frustrated, but most also saw the deal as the only option. An independent KordiaMentha report and NZ Shareholders Association Advisory reached the same conclusion. An NZSA representative at the AGM, who held proxies for 43 shareholders, gave the lukewarm endorsement that it was the only viable choice.
The takeover resolution (requiring 50 per cent support) was a foregone conclusion in any case, given Orion founder and chief executive Ian McCrae’s 49.75 per cent stake.
There was tension on the buyback resolution when tech industry veteran and Orion investor Hamish Mcleod asked if it could allow McCrae to take the company private. His question from the floor drew nods of support. McCrae said any decision to delist would go a vote among remaining shareholders. In any case, proxies indicated the resolution would pass by a wide margin. Here’s a Q&A to help you diagnose the deal:
What happens from here?
The Overseas Investment Office has to approve the deal, so the buyout price can be finalised. Orion chairman Andrew Ferrier described the OIO process (which has been initiated by Hg as the buyer) as “very opaque”. He said he had no feel for whether a decision would come from the regulator by the end of this month, or it would take into the new year.
Who else has to give the green light?
Hg shareholders have to approve the deals. So does a group of the largest customers of Orion’s Rhapsody
software, a process that’s still in its early stages. Orion CFO Mark Tisdel says a couple of customers have tried use the leverage of approval to screw Orion down on pricing. He says he’s told them that’s not on.
What is HgCapital buying exactly?
First, some background on Orion’s setup. Earlier this year, the company restructured into three divisions — Rhapsody (its core software, which helps healthcare providers share patient records), Population Health (tools for Government agencies and others to analyse healthcare across an entire population), and Hospitals (enterprise resource planning or ERP software for running a hospital).
Which division is the cash cow?
Rhapsody. In 2017, it brought around $60m earnings before interest and tax. Population Health and Hospitals both lost buckets of money, pushing Orion to its $40m net loss last year. KordaMentha’s report says Hospitals.
Why is Orion selling its cash cow and keeping the others?
Ferrier told the AGM audience it had to be realistic. Orion needed to recapitalise, and Rhapsody was the only asset that was attractive to buyers. McCrae added that Hg was the only suitor willing to let Orion keep a chunk of Rhapsody, and up
for a stake in Population Health. Population Health and Hospitals were simply less mature products than Rhapsody, he said. Funds from the deal would be used to develop them.
When will Population Health and Hospitals become profitable?
Ferrier, McCrae and Tisdel all dodged this question. Craigs Investment Partners’ research analyst Stephen Ridgewell recently noted Orion’s consistently over-optimistic, so it’s unlikely long-suffering investors would see much stock in guidance even if it was offered.
What will shareholders be able to sell their shares for under the buyback?
Somewhere between $1.16 and $1.26 (Orion shares were trading Friday at $1.07). Ferrier says the price is guaranteed not to go below $1.16, at least, it can’t without another special meeting and vote being called. He says Orion made the band pretty wide because it’s hard to gauge exactly when the OIO will approve the deal (or not).
Is Ferrier right to promote the buyback price as a big premium?
It depends on your timeframe. The chairman is correct to say it represents a 38 per cent premium on Orion’s weighted average price over the 20 trading days before the deal was announced. But to those who bought in soon after Orion’s 2014 IPO, as its shares briefly topped $6, pushing its market cap fleetingly over $1b, it’s a less satisfactory offer, if the only one going.
What is the capital structure of the deal?
Hg will acquire 100 per cent of Rhapsody for $205m. Orion will use about $28m of the proceeds from that deal to buy a 24.9 per cent stake in Rhapsody. Hg will acquire a 24.9 per cent stake in Population Health for around $20m, while Orion will put $12m of its Rhapsody proceeds into unit. Exact amounts will depend on cash on hand at the time the OIO approves the deal (if it does).
Why a convoluted buyback plan? Why not just offer a special dividend?
A number of angry shareholders just wanted a payout. Ferrier said the buyback arrangement would leave them better off because it would not be a taxable event.
Why did it take a year to reach a deal?
McCrae says Hg expressed interest from the get-go. Time was needed for Orion to carve out Rhapsody into a separate business.
That was part of a wider restructure that saw Orion’s staff trimmed from around 1250 to around 1000 and $40m in costs taken out of the business.
Will Rhapsody list?
No. Rhapsody will operate as a private company.
What about Orion’s listing structure?
The remaining Orion Health will maintain its single NZX listing but, post-deal, consist of two legallyseparate companies, one controlling Population Health, the other Hospitals.
Where are Rhapsody staff today?
Nearly all of the software developers working on Rhapsody are in Orion’s Auckland office, with a sprinkling in Boston.
Will they stay in Auckland if the buyout goes ahead?
Yes. McCrae pressed to keep jobs in NZ under the new ownership. Tisdel notes it also makes good financial sense for Hg.
What stake will McCrae own after the deal?
Some shareholders have been critical of the founder clinging to his holding, seeing it a barrier to capital raising and indicative of what some see as the product-focused chief executive’s “control freak” tendencies (as one shareholder described him to the
Herald). Post-deal, he will still loom large. By KordaMentha’s figures, McCrae, who will sell 20 per cent of his shares, will hold a minimum stake of 44.16 per cent in the reduced Orion and a maximum of 100 per cent. The exact amount will depend on how many shareholders decide to sell out.
Could Orion be forced to delist from the NZX?
It’s possible, if enough shareholders take the money and run. McCrae’s decision about privatisation going to a shareholder vote notwithstanding, KordaMentha notes NZX has the power to terminate a listing if the number of shareholders falls below 500.
Will Orion de-list from the ASX?
Yes. Tisdel says Orion will go NZXonly regardless of how the Hg deal pans out. Trading volume is just too low to justify what he called ASX’s “high fees”, he says.
What went wrong?
Ferrier told the AGM he was “bitterly disappointed”, at Orion’s results over the past two years. McCrae said the company had faced a perfect storm as many of its Obamacare customers in the US (home to half Orion’s revenue) ran out of money and started to cancel orders just as the company needed to invest heavily to move its software to the cloud.
It didn’t help the health software Orion bought from Microsoft (which powers its Hospitals solution) turned out to be in much worse shape than it thought, McCrae added. The CEO also said Orion had become too “corporate and slow moving”.