New Issue: Performant Financial Corp. (PFMT) Convertible Senior Notes due 2020

Performant Financial plans to tap the convertible market in order to partly fund a just-announced strategic and possibly game-changing acquisition. Specifically, PFMT plans to issue $80 million in five-year senior convertible notes along with $50 million of concurrently marketed common in order to finance the $130 million acquisition of Premier Healthcare Exchange (PHX). Closing of the acquisition is dependent upon completion of the financings. Our HOCS slash line measures 65 Overall / 84 Growth / 29 Safety. The low (for a new issue) HOCS safety score highlights not only the tiny market capitalization but also the recent and on-going structural challenges associated with the company’s federal government and governmental agency dependent business model. However, the low score should be viewed with skepticism given the tiny market cap and an extremely volatile stock. As a result, potential investors should proceed with caution, despite the bond’s attractive optics.

In acquiring PHX, PFMT intends to reduce its reliance on federal government and governmental agency contracts and set the combined entity on a new course. The combined PFMT/PHX is expected to be a powerful provider of comprehensive cost management solutions. In addition, combining PFMT’s Medicare and commercial experience with PHX’s group health expertise should accelerate growth by diversifying revenue, allowing entry into new markets, adding new customers as well as leveraging the combined entity’s existing audit and recovery infrastructure. If successful, this acquisition could prove to be a game-changer for beleaguered PFMT. We estimate that PFMT is paying a 2.5 times revenue multiple (LTM Revenues = $52.5 million) and 10.3 times EBITDA (LTM Ad. EBITDA = $12.6 million / 24% Margin). Furthermore, the acquisition of PHX is expected to be immediately accretive on all measures.

PFMT helps government and commercial enterprises enhance revenue and contain costs by preventing, identifying and recovering waste, improper payments and defaulted assets. The company is a leading provider of these services in the context of several industries, including healthcare and student loans. It also provides professional services related to the recovery effort, including reporting capabilities, support services, customer care and stakeholder training programs meant to reduce the likelihood of improper payments. The company’s revenues, earning, and cash flow have all come under considerable pressure the past few quarters primarily due to procedural changes adopted by the Centers for Medicare & Medicaid Services (CMS). The threat of a student loan bubble is a growing concern as well.  

PHX provides advanced network and cost management solution for health plans that combine claim processing automation with professional services to deliver a timely, centralized approach to healthcare cost management. The approach results in a significant reduction in payment errors, appreciable improvement in the time needed to bring claims to resolution, and in savings that substantially reduce the healthcare costs of its clients. The company’s solutions are used by industry leading insurance companies, Taft-Hartley Funds, HMO’s and Third Party Administrators.

Pro Forma Summary Statistics

Revenues:                                                $268 million

LTM EBITDA:                                            $72 million

Total Debt:                                              $194 million

Debt to EBITDA:                                                      2.3x