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Information, analysis and actionable ideas to help you see the other side of the Wall Street hype machine.
Information, analysis and actionable ideas to help you see the other side of the Wall Street hype machine.
NEW YORK, Sept. 25, 2019 /PRNewswire/ -- Report entitled "A Premier Short" outlines how Premier, Inc. faces 55-75% downside risk to approximately $8 to $15 per share. The report explores the potential devastating financial impact to Premier of two upcoming contract renewal periods where Spruce Point believes common sense and basic stewardship will dictate that member owners will significantly renegotiate their shareback rates to market levels now that their equity in Premier is fully vested.
- Unique Pre-IPO Restructuring Skews Company Economics: Premier was mutually owned by its member owner hospitals prior to its 2013 IPO. To free up cash for Premier to invest in ancillary services, these hospitals agreed to accept sharebacks of 30% – less than half the market rate of 60-75% – in exchange for equity in Premier and modest tax-related distributions. These agreements were structured to last only five or seven years. While most member owners signed to five-year deals renewed their agreements on similar terms, they most likely did so to avoid having to forfeit their as-yet unvested equity (~30% of their respective equity allocations at the time). Premier's two largest GPO members, whose seven-year contracts expire on Oct 1, 2020, will have no unvested equity remaining by the time their deals are scheduled to expire, and therefore have far greater incentive not to renew their Premier-friendly deals on the Oct 1, 2019 opt-out deadline. The loss of these customers or the restructuring of their agreements could cut Premier's FY21 EBITDA by 9-17%.
- Complacent Sell-Side Assumes Favorable Post-IPO Economics Can Last Forever: Premier's ~95% renewal rate during its 2017 renewal cycle appears to have convinced the sell side that renewal risk is near-nonexistent. It seems to ignore the fact that, unlike the 2017 renewal class, member owner hospitals whose contracts are due to auto-renew next week will have no remaining unvested Premier shares, and will therefore no longer have to accept below-market shareback rates for access to Premier equity. The sell side also appears to underestimate the prevailing market shareback rate by benchmarking against MedAssets. MedAssets, a GPO which was until recently public, reported superficially below-average shareback rates due to its practice of bundling GPO agreements with ancillary services. Our market intelligence confirms that the market-level shareback rate is in fact 60-75%, and rising.
- Increased Sharebacks Could Be Highly Material To Hospitals With Expiring Deals: Greater New York Hospital Association (GNYHA), Premier's largest GPO member and a 10% Premier customer, is one of the hospitals whose contract is set to auto-renew next week. By analyzing tax filings, Spruce Point has found that, by receiving a market-rate sharebacks, GNYHA's total income could increase by 33%. We believe that GNYHA may have a responsibility to its member hospitals to seek sharebacks more in-line with market rates, and anticipate that it may not renew its current agreement.
- Emerging Signs That Hospitals Are Prepared To Exit - Valuation At Significant Risk: Member owners are divesting of Class B shares at an accelerating pace, perhaps reflecting their knowledge that Premier's economics are set to correct in the near future. Large hospitals such as Johns Hopkins Medicine have already exited, sacrificing some of their unvested Class B shares to do so. New language introduced in Premier's most recent 10-K (filed Aug 2019) also suggests that renewal risk is rising.
PINC trades at a 6.6x FY22 EV/EBITDA multiple based on the sell-side's inflated estimate of future earnings. Reverting member owner hospitals to sustainable market-level shareback rates would cut consensus FY22 EBITDA in half. PINC should also trade at a lower EBITDA multiple, as Premier's true underlying economics are worse than the market currently believes. Valuing PINC shares at 4-5x FY22 EBITDA on an estimate of EBITDA 50% below the Street would imply that PINC shares are worth $8-$15, 55%-75% below current levels.
The research note can be found at www.sprucepointcap.com and updates will be posted on twitter @sprucepointcap.
Spruce Point Capital has a short position in Premier, Inc. (PINC) and stands to benefit if its share price falls.
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