CareMax: Steward Health Care Deal Highlights Growth Ambitions

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CareMax (NASDAQ: CMAX), a value-driven provider of care for the elderly, looks set to further capitalize on the secular tailwinds in the global Medicare Advantage capitation primary care space with the addition of the Medicare VBC (“Care based on value”) of the Steward Health Care System. Financially, the c. The $135 million purchase price and steady EBITDA generation ($110-115 million expected by FY2025), along with aligned incentives (performance-related compensation), make it a compelling transaction for shareholders. Strategically, the acquisition of Steward also expands CMAX’s Managed Services Organization (MSO) membership, significantly accelerating the path to profitability through operating leverage as the company expands its revenue base. With growth funding needs also being considered with a new line of credit and industry-leading CMAX’s MLR (“Medical Loss Ratio”) intact, I see a lot of upside for stocks at the current c. 0.7 x Valuation of the income statement.

A closer look at the acquisition of Steward Health Care System

CMAX recently announced the acquisition of Steward Health Care System’s Medicare VBC business. As part of the agreement, CMAX will provide a c. A cash consideration of $25 million and 23.5 million Class A shares (equivalent to approximately 21% of the Class A shares outstanding prior to the transaction), implying an approx. Total consideration of $135 million. Steward shareholders also have the option of a top-up of additional CMAX Class A shares – a scenario that could see its current shareholders hold a significant c. 41% of Class A shares outstanding. The earn-out, however, would depend on converting 100,000 Medicare lives into value-based risk agreements while maintaining an 85% MLR for consecutive quarters.

Steward Acquisition Overview


After the acquisition, CMAX will be the exclusive value-based MSO for Steward’s Medicare Network, comprising 170,000 VBC beneficiaries and 1,800 providers of Steward’s healthcare programs. The distribution of patients is as follows: 112,000 from the MSSP (“Multipurpose Services Program for Seniors”), 50,000 from MA (“Medicare Advantage”) and 9,000 from DCE (“Direct Contracting”). At closing, this would involve a total of over 200,000 beneficiaries and over 2,000 providers in ten states for CMAX, with new states reached including Arizona, Pennsylvania and Texas, among others. While the incremental revenue contribution amounts to only $35-40 million per year under current shared savings accounting, the targeted conversion of over 100k lives to capitation MA would produce a significantly larger $1.6-1.7 billion revenue opportunity by FY2025 stand, the transaction is expected to close in H2 ’22.

Financially attractive trading conditions

Compared to the expected FY2023 EBITDA of $15-20 million, the initial c. A consideration of $135 million equates to an EV/EBITDA multiple of 7 to 9x. But Steward’s EBITDA projections are guided to increase further. From $10-13 million in fiscal 2022 and $15-20 million in fiscal 2023, the acquired assets are guided to generate impressive EBITDA of $100-115 million by fiscal 2025 (implying a CAGR of over 100%). As such, using the base case medium-term projection would imply a c. 1x EV/EBITDA valuation. Importantly, Steward’s EBITDA projections also reflect additional operating expenses to professionalize members and, therefore, will accrue entirely to CMAX. Similarly, the expected revenue growth looks realistic as it is mainly driven by the conversion of partial risk MA contracts and fee-for-service MA contracts into full risk MA contracts.

Stewards Financial Projections


It should be noted, however, that Steward shareholders can earn a c. 20% stake if the company manages to convert 100,000 members to at-risk VBC agreements after the acquisition and maintain an 85% medical expense ratio for consecutive quarters. This could result in significant equity dilution for CMAX shareholders, but since the dilution is tied to significant improvements in CMAX’s EBITDA profile, shareholders will likely come out with a significant increase anyway.

Longer-term growth ambitions boosted by new credit line

With the acquisition of Steward’s assets, CMAX will not only gain access to new markets, but also the opportunity to reprioritize clinic builds around MSO density, focusing on overlap with strategic partners like Elevance Health (ELV) and the private company Related. The focus on patient density is a key positive for new build economics, as it reduces upfront cash burn and enables better complementarity between new clinics and the company’s overall MSO growth. Longer term, the hope is that CMAX will identify better performing providers and transition them to company-owned clinical/hybrid models. As the transition would allow for a greater impact on patient health outcomes through ancillary services with more touch points, success here could be massively accretive to the entire business.

CareMax post-acquisition projections


The new c. $300 million credit facility including c. $190 million initial term loan and a c. $110 million deferred draw term loan. Relative to the existing $120 million term loan, the line of credit is expected to generate significant net cash proceeds in the next quarter, subject to an initial effective interest rate of c. ten%. The fundraising will be good news for shareholders given the ongoing rate hikes and the fact that CMAX had fully utilized its earlier revolver capacity. As the new deal provides management with enough firepower to accelerate the center’s growth according to plan, CMAX has a clear track to achieve FCF positivity in the years to come.

Final grip

Overall, the acquisition of the assets of Steward Health Care System appears to be a very favorable transaction for CMAX shareholders. The purchase consideration of $135m is well covered on the balance sheet, while the aligned incentives and the addition of $110-115m of EBITDA generation by FY2025E makes sense. From a strategic perspective, expanding MSO membership post-deal should also accelerate the path to profitability as the company expands its revenue base and improves margin profile.

And long-term, the CMAX growth track looks attractive, as the company continues to benefit from secular tailwinds in the global Medicare Advantage capitation primary care space, given its outsized exposure to the Medicaid/Medicare-eligible population. . Since the financing risk is also limited following the new credit line, I remain optimistic on CMAX shares at the current price c. 0.7 x Valuation of the income statement.

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