Premier process on hold as ownership structure is considered

Premier's hospital owners evaluate whether to roll equity or cash out in a potential sale.

The sales process for Premier Inc. is proving complex as hospital-owners of the group purchasing organization evaluate whether to roll equity or cash out in a potential transaction, a source familiar with the process told PE Hub.

Centerview Partners and Bank of America Merrill Lynch are providing financial advice to the company, this source and two others told PE Hub.

Preliminary indications of interest have been submitted from parties including large buyout funds; however, the process is on hold, one of the people said. Premier over the next six months or so will go through a process of determining which health system shareholders will remain investors and which will exit in a potential transaction, the source said.

Charlotte, North Carolina’s Premier was formed in 2013 with two classes of stock. Class A shares are held by public investors and trade on the Nasdaq. Class B shares are held by its member owners and customers, which include health systems across the U.S.

Member owners own approximately 46 percent of equity, down from 78 percent in October 2013, while Class A common stockholders make up more than 54 percent of voting power for election of directors, Premier said in a November investor report.

Potential bidders were initially told that approximately 85 percent of Premier’s member owners are expected to roll their stakes, but plans were not agreed upon or committed ahead of IOIs, one source said.

Until the structure of the entity is determined, there is a risk that member-owners wishing to cash out have an opportunity to move some of their business to another group purchasing organization, this person said.

In other words, sponsors’ willingness to pursue a leveraged buyout and a potential valuation will likely depend on whether Premier’s customers commit to long-term contracts, this person said.

A Raymond James analyst report published in December suggested an LBO could be priced in the mid-to-upper $40 per share range. On the high end, $48 per share would imply new sponsor equity of approximately $2.5 billion, the report said.

Premier shares fell 3.8 percent to $36.43 on Thursday, bringing its market cap to $4.45 billion.

Some sources said it’s too early to determine a likely valuation given its complex ownership structure. Premier’s takeout price ought to dip lower if its PE suitor needs to put up more equity to buy out member owners that are liquidating, one source said.

Raymond James analyst John Ransom characterized Premier as the perfect take-private candidate, pointing to the supply chain segment’s asset-light dynamics and strong cash flow: “You’re not driving trucks and moving freight. You’re just moving dollars.”

Ransom added that there is typically not huge value-add when it comes to switching GPO providers.

Premier is best known as a group purchasing organization, helping its hospital member-owners achieve savings on healthcare products and services by leveraging its approximately 2,800 negotiated contracts with suppliers.

Premier boasts that it conducts business with more than 4,000 hospitals and health systems, managing more than $61 billion in supply chain spend and maintaining clinical, financial and outcomes data on more than 45 percent of U.S. hospital discharges.

Its supply chain division accounted for 70 percent and 81 percent of fiscal year 2019 non-GAAP net revenue and segment adjusted Ebitda, respectively, with the remainder stemming from its performance services division, Premier said.

Through its performance services arm, the company has expanded into areas through M&A over the years, entering areas including healthcare informatics and data analytics, consulting services and performance improvement collaboratives.

Some of those bets didn’t work out, Ransom told PE Hub: “If I were PE, I’d buy the supply chain business outright, or buy the two [segments] together and see if we can sell the other pieces over time.”

Another source agreed that its possible the company’s two segments are ultimately split up.

A sale to a strategic is not out of the realm of possibility, sources added, pointing to AmerisourcBergan as a potential logical suitor.

Premier declined to comment. Centerview and BAML representatives didn’t immediately return requests for comment.

Action Item: Reach Premier Vice President, Investor Relations, Jim Storey, at jim_storey@premierinc.com