New Frontier Corp. (NFC) Announces Business Combination

New Frontier Corp. (NFC), announced this morning that they have entered into a definitive agreement to acquire United Family Health (“UFH”), an integrated premium private healthcare operator in China, to create one of China’s largest publicly listed integrated healthcare services company.  The combined company is expected to have an initial enterprise value of $1.44 billion, with a purchase price of $1.3 billion and will operate under the name of New Frontier Health Corporation (“NFH”).

UFH was one of the first international standard privately-owned hospitals in China, and over the past 22 years, has provided medical service to China’s population.  Today, UFH is one of the largest integrated private healthcare service providers in China by revenue, with nine hospitals (two of which are under construction, one with a contract to be finalized before combination closing) and 14 clinics in all four first tier cities and select second tier cities.  Furthermore, its Beijing and Shanghai Puxi facilities were among the first JCI (Joint Commission International) accredited facilities in China, and all of UFH’s major facilities with over three years of operating history are re-accredited by JCI on a three-year cycle.

To fund the purchase price and provide working capital to the Company, in addition to the $478 million of cash raised by NFC in its initial public offering and through forward purchase commitments obtained at the time of NFC’s initial public offering, NFC has obtained an additional $711 million in equity commitments (at $10.00 per share) from a group of well-known investors including Vivo Capital, Nan Fung Group, and a group of strategic investors and global asset managers.

Of the additional $711 million in equity commitments, NFC is expected to utilize at least $565 million in support of the acquisition. In addition, investors representing $90 million of cash held in NFC’s trust account have committed not to exercise their redemption rights with respect to their shares. Existing management of UFH and Fosun Pharma, will roll a portion of their ownership in UFH and together are expected to own an aggregate of approximately 12% of NFH at closing. NFC has also obtained debt commitments from certain lenders, pursuant to which the lenders have committed to make available to NFC at closing up to $300 million through a senior term loan facility.

In connection with the transaction, NFC expects to provide the Company with approximately $180 million of additional primary capital ($150 million less $30 million in transaction expenses,subject to the outcome of trust account redemptions) . These proceeds are expected to fund capital expenditure commitments, future expansion of current and new facilities, potential synergistic and accretive acquisitions and transaction expenses.

Quick takes:  I don’t know much about the Chinese Healthcare System, but it would appear they are trying to copy the U.S. system (including the roll-out of a managed care network), which as we’ve seen, works pretty well for everyone except for the citizens who need, you know, accessible and affordable healthcare. Healthcare is a luxury item in this country and it would appear to be going the same way in China.  With that being said, if you’re providing that luxury item, you stand to be fairly profitable. And particularly, when that field is relatively nascent and you’re grabbing market share.  However, the press release and presentation seemed a little light on details. Additionally, regarding the comps, UFH provided two different ways of looking at UFH for their EV/Adjusted EBITDA multiples – “UFH All” and “UFH (excluding losses on their new assets)”. If you look at “UFH All”, the multiples look unfavorable.  Plus, only ~$150 million cash is expected to go to the balance sheet. The rest of the $1.342 billion purchase price is going to “vendors” (~$1.162 billion), but no breakout or info was provided on the vendors. However, that’s a lot of cash going out the door.  Having said that, they have a massive amount of capital commitments so this transaction is getting done. But ultimately, we need more information, or the ability to drill down on the details to properly evaluate this combination.  There are still too many question marks.  As a result of those questions, the share price reaction seems a bit tempered.

The transaction is expected to close in the fourth quarter of 2019.

THE TRANSACTION

Purchase Price: $1.3 billion, Implied EV $1.44 billion

NFC expects to fund the acquisition of UFH using approximately:

• $478 million of cash proceeds from NFC’s initial public offering and from forward purchase agreements entered into at the time of NFC’s initial public offering,
• $565 million in private placement proceeds (out of $711 million of commitments)
• Up to $300 million in loan facility.
• NFC has received commitments from certain shareholders representing $90 million not to redeem their public shares.
• Upon the closing of the transaction, NFC expects $180 million of cash to remain on UFH’s balance sheet (subject to redemptions of the trust account), which will be used to fund transaction expenses, capital expenditure commitments and future expansion of the Company.

ADVISORS

• Credit Suisse and UBS AG are serving as capital markets advisors to NFC
• Winston & Strawn LLP, Simpson Thacher & Bartlett LLP, Kirkland & Ellis LLP, and Global Law Office are acting as legal advisors to NFC.
• Cleary Gottlieb Steen & Hamilton LLP and Fangda Partners are acting as legal advisors to TPG
• Paul Hastings is acting as legal advisor to Fosun Pharma
• Hughes Hubbard & Reed LLP is acting as legal advisor to Roberta Lipso