Teladoc and Livongo $18.5 billion Merger
By Alexandros Assiotis, Head of Healthcare at the KCL M&A Society
Acquirer: Teladoc Health (TDOC)
Target: Livongo (LVGO)
Estimated Value of deal: $18.5 Billion
Closing Date: 30th of October, 2020
Acquirer Advisors: Lazard served as exclusive financial advisor to Teladoc Health and Paul, Weiss, Rifkind, Wharton & Garrison LLP served as legal advisor.
Target Advisors: Morgan Stanley served as exclusive financial advisor to Livongo and Skadden, Arps, Slate, Meagher & Flom LLP served as legal advisor
Teladoc Health (TDOC), the global market leader in telemedicine, and Livongo (LVGO), the leading Applied Health signal company, recently announced that they have entered into a $18.5 million merger agreement under the Teladoc name. Representing the largest digital health deal in history, the size of the deal reflects the heightened importance of telehealth in the healthcare sector with Teladoc seeing a 203% increase in virtual visits in the second quarter of 2020. As well as the telemedicine industries' current rates of growth and potential to serve as a disruptor to conventional methods of healthcare delivery, the unprecedented uncertainty surrounding the Covid-19 pandemic has led to recent surges in growth as consumers choose to avoid non-essential in-person visits to hospitals and clinics to minimize exposure to the virus.
Under the terms of the agreement which has been approved by the board of directors of each company, each Livongo share will be exchanged for 0.5920x shares of Teladoc Health plus cash consideration of $11.33 for each Livongo share, representing a value of $18.5 billion based on the closing price of Teladoc Health shares as of August 4th, 2020. Upon closing of the deal, Teladoc Health shareholders will own approximately 58%, diluting Livongo shareholders shares to 42% of the combined company. The combined company is expected to report pro forma revenue of about $1.3 billion this year — an 85 percent growth year over year. The combined company expects to have a pro forma adjusted EBITDA of more than $120 million for the year.
The merger — the largest healthcare deal of 2020 to date — creates a global leader in consumer-centred virtual care which looks to take advantage of Teladoc’s 70 million client base and international presence as well as using the transaction as an entry point in the chronic condition market, given Livongo’s focus on chronic conditions such as diabetes and over 400,000 member client base. The combination will combine Teladoc’s existing base as a foundation for referrals into Livongo’s extensive general medicine and specialist network that can provide clinical guidance, decision-making and prescribing for Livongo patients through virtual access to health coaching and clinical physicians. Additionally, The transaction displays significant strategic and cost synergies with Teladoc announcing that the merger would drive revenue synergies of $100 million in the next two years and cost synergies of $60 million by 2022.
Company Information: Teladoc Health (TDOC)
Founded In: 2002 in Dallas, Texas, United States
Headquartered In: Purchase, New York
CEO: Jason Gorevic
Number of employees: 2,000
Market Cap: 18.357B
Enterprise Value: 16,161,110
LTM EBITDA: 18.78M
LTM Revenue: 867.13M
Teladoc Health is a telemedicine market leader that provides virtual healthcare services on a business-to-business basis in the following six categories: platform and program services, guidance and support, expert medical services, mental health services, telehealth, and integrated virtual care. The business model focuses on individuals, healthcare insurers, employers, hospitals and healthcare systems providing benefits such as cost-reduction and increasing access to health care.
Company information: LIVONGO (LVGO)
Founded In: 2008
Headquartered In: Mountain View, California, United States
CEO: Zane M. Burke
Number of employees: 785
Market Cap: 14.48B
Enterprise Value: 12,518,550
LTM EBITDA: -54,470
LTM Revenue: 170,198
Livongo Health Inc is a consumer digital health company that focuses on chronic conditions, particularly diabetes. It provides a data science and technology-enabled platform for detection of diabetes offering patients a personalized experience combining technology and coaching providing real-time monitoring and support.
The covid-19 pandemic is accelerating the long-anticipated surge in telemedicine services worldwide, with analysts forecasting the telemedicine industry to accelerate to a projected value of $175.5 billion this year. The Teladoc-Livongo merger combines two highly complementary pioneers that will redefine virtual care, digital health and healthcare delivery creating a global leader in virtual care. While Teladoc and Livongo have complementary capabilities, traditionally the firms have different functions. Livongo provides tools that slot into the daily lives of patients such as diabetes, helping them manage their conditions. Teladoc focuses on connecting patients with healthcare services through the use of smartphones or tablets. Through the merger, Teladoc can now push into Livongo’s chronic health management tools as part of its conversations with insurers about remote health to form a consolidated platform, where Teladoc’s network of clinical physicians, doctors and nurses can recommend Livongo’s vast array of tools during patient consultations.
The merger allows the two companies to take advantage of a wider platform of consumers with Teladoc providing access to 70 million customers in the U.S. and 410,000 Livongo diabetes members. Given a less than 25% overlap in Teladoc and Livongo commercial relationships across health plans, partnerships and employees, and with Livongo penetrating 30% of the Fortune 500 and Teladoc penetrating 40%, the combined entity demonstrates a sizeable revenue opportunity.
With many investors and financial analysts believing the financial arrangements of the deal have led to Teladoc overvaluing the Livongo purchase price, we can expect the price volatility of both stocks to remain persistently high. There was also a feeling that the firm may be expanding too quickly after absorbing Intouch in a $600 million deal a few months ago. The dilution of shareholder holdings was another factor behind the discontent as it raised possible concerns over the success of the integration of the two firms. In addition, as COVID-19 has accelerated many trends in healthcare, many analysts are sceptical on whether trends such as virtual healthcare will persist after the pandemic despite moves by the federal and state governments to encourage digital healthcare.
Through the Teladoc-Livongo Investor presentation, management of the combined entities expects the merger to drive significant revenue and cost synergies. From a financial perspective, the digital health merger is expected to achieve revenue synergies of $100 million by the end of the second year following the close, and $500 million on a run rate basis by 2025. This increase in revenue is due to significant synergy opportunities through increased cross-selling opportunities across multiple channels, improved member engagement and member retention rates, and more efficient care models and solutions. In addition, the merger is expected to achieve $60 million in cost synergies by 2022 which can be reinvested to drive top line growth and margin expansion.
Source: Teladoc Health Inc.
An important long-term advantage for the combined entity is that the merger combines comprehensive clinical expertise with an abundant technology and data driven experience. The transaction combines Teladoc Health’s broad integrated services across virtual care with Livongo’s data-driven approach to providing personalized and timely health signals to create a comprehensive virtual healthcare delivery system. The combined entities' platform will include the full range of health support including Al-driven client platforms, health coaches, therapists and board-certified physicians available anytime and anywhere. By reaching a broader market segment and targeting millions of new customers, the more large-scale monitoring systems enable timelier interactions with patients.
As the largest healthcare transaction of 2020 to date, Industry insiders expect the merger to spark further M&A activity in virtual care and telemedicine as the Covid-19 pandemic continues to press patients and providers online. Telehealth and virtual care have taken off amidst the pandemic after years of slowed adoption and regulatory hurdles and with the Trump administration also enacting temporary Medicare regulations to increase usage in response to the pandemic, middle-market and small firms may look to mimic the Teladoc-Livongo merger and take advantage of the recent surge of the industry. According to Aj Prabhu, CEO and co-founder of Mercom Capital Group LLC, smaller companies may be incentivized to make moves in order to remain competitive. Also, according to George Hill, a managing director and senior equity research analyst with Deutsche Bank, large players in the market space such as health insurers Anthem Inc., Cigna Corp. and CVS Health Corp may look to bring virtual care or telehealth companies of their own. It will be interesting to see how this deal transforms the virtual and telemedicine market space, pushing firms in the market to pursue M&A deals of their own.
Risks & Uncertainties
Following the announcement of the deal, Teladoc and Livongo shares were down 17% and 10% respectively as Investors were concerned about Teladoc overpaying on the deal. The scrutiny surrounding the deal is fuelled by the fact that Livongo’s current company profile does not fit that of a typical acquisition target. Livongo’s exceptional financial performance reflected by its growth in value of 427% since the start of 2020 and 150% in sales growth during the COVID-19 pandemic have raised concerns over the practicality of the deal financially, and whether management forecasted slower growth rates and concluded that the market over-valued the company. Analysts say the total deal price of $158.99 per share represents a 10% premium over Livongo stock's record closing price of $144.53 as of Aug. 5, leading to the market pushback on the high valuation.
Source: S&P Global Market Intelligence
Furthermore, the telemedicine industry may not be as profitable as first expected. While the global telemedicine market is expected to grow 17% annually to $38 billion by 2022, Teladoc and Livongo between 2017 and 2019 reported cumulative losses of $310 million and $29 million respectively. In addition, the market has assumed substantial growth in virtual healthcare where the event of a Covid-19 vaccine or treatment is not factored into the analysis. The introduction of a Covid-19 vaccine or treatment may lead to reductions in demand for virtual healthcare and slower industry growth than first projected where the 200% increase in Q2 visits may be flattened next year.
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