February 2019

Hedley Goldberg (Managing Director and Global Head of Healthcare Services, Rothschild & Co)

The Healthcare M&A and funding environment

DONE

1

In the public markets, valuations are still broadly correlated with growth

– Faster growing companies command a premium and disappointments in growth lead to setbacks in share

price performance

In the private markets, valuations have been supported by inward investment from Infrastructure

funds in asset backed businesses, accompanied by Private Equity investing heavily in platforms

– Financial sponsors have started to behave like strategic investors

The effect of Brexit on currency is not predictable

The debt markets have not fully opened

– 2019 has seen a slow but positive start

– Lending volumes were strong in 2018, but still weaker than 2017 records

As a result, we will see business as usual in the lower mid market, a compression of deal activity into

H2 and massive growth of credit funds relieving reliance on the bank market

Introduction – Key points

Public market valuations are broadly

correlated with growth

Revenue growth in the market has been

challenging, rates are currently lower than

historic levels

Companies growing faster than their peers

trade at a significant premium

In the public markets, disappointments in

growth have contributed to setbacks in share

price performance

Financial sponsors have started to behave like

strategic investors

In the private markets, pricing has been

supported by inward investment from long-

term investors attracted to asset backed

businesses

The effect of Brexit on FX rates is not

predictable

A look back into the 2018 debt market

Strong lending volumes, but weaker than 2017

records

Debt markets slow but positive start to 2019

Credit funds now represent a deep and

permanent pool of alternate liquidity

2

1

3

4

5

2

EV / EBITDA (LTM) vs. EBITDA CAGR (18E-20E) EV / EBITDA (LTM) vs. Revenue CAGR (18E-20E)

Some earnings disappointments have impacted ratings

Public market valuations are broadly correlated with growth

Source Factset as of 7 Feb 2019 Note Selected International Acute players, Financials calendarised to December

DONE

Spire

Mediclin

Enel-Med

Medicover

MedLife

Ramsay Healthcare

Mediclinic

Healthscope

Netcare

NMC

Life Healthcare

HCA

Tenet

UHS

Apollo

Bangkok Dusit

BumrungradRaffles Medical

KPJ Healthcare

Bangkok Chain

Mouwasat

y = 55.738x + 6.0861R² = 0.7732

y = 133.86x + 1.7549R² = 0.7878

--

5x

10x

15x

20x

25x

30x

35x

-- 3% 6% 9% 12% 15% 18% 21%

EV

/ E

BIT

DA

LT

M

Revenue CAGR (18E-20E)

Developed markets Emerging markets

Spire

Mediclin

Enel-Med

Medicover

MedLife

Ramsay Healthcare

Mediclinic

Healthscope

Netcare

NMC

Life Healthcare

HCA

Tenet

UHS

Apollo

Bangkok Dusit

Bumrungrad

Raffles Medical

KPJ Healthcare

Bangkok Chain

Mouwasat

y = 30.706x + 7.1079R² = 0.5126

y = 140.72x + 1.612R² = 0.8131

--

5x

10x

15x

20x

25x

30x

35x

-- 5% 10% 15% 20% 25% 30%

EV

/ E

BIT

DA

LT

M

EBITDA CAGR (18E-20E)

Developed markets Emerging markets

3

(6%)

(4%)

(2%)

--

2%

4%

6%

8%

10%

12%

1997 2000 2003 2006 2009 2012 2015 2018

Annual revenue growth (Index constituents of the S&P 500, FTSE 100, CAC 40, DAX 30 and Nikkei 225)1

Revenue growth in the market has been challenging, rates

are currently lower than historic levels

Note Historic revenue growth rate for current index constituents of the S&P 500, FTSE 100, CAC 40, DAX 30 and

Nikkei 225; growth rates based on local currency growth for each fiscal year; trailing-12-month growth rates shown

for 2018 as of September 2018

Growth rates

recovered from

2016, still muted

vs. historical

levels

10.1% 9.7%

5.9%

2.4%

DONE

Source Bain & Company

4

14.6x

12.4x

9.6x

Top third Middle third Bottom third

Average EV / EBITDA vs. expected sales growth (Selected S&P 500 constituents)

Companies growing faster than their peers trade at a

significant premium

Sources Bain & Company

Markets like

growth either

organically or

through well-oiled

M&A machines

Investors reward

growth

capabilities with

premium

valuations

2

1

Investors

willing to pay a

significant

premium for

growth

+c.50%

+c.20%

DONE

Notes 390 companies analysed, excluding financial services companies; EV / EBITDA represents a forward

multiple for 2019E; companies grouped into top, middle, bottom third based on positioning within their

respective industry groups on expected sales growth for the 2018E – 2020E period

5

In the public markets, disappointments in growth have

contributed to setbacks in share price performance

Commentary Key theme Key

countries Company

Impact on

share price

(day)

• Announced H1-18 EBITDA of £66m, materially lower than £83m

in H1-2017 due to significantly declining NHS admissions

Earnings miss /

Funding

pressure

(21.8%)

6 Aug 2018

• Revised FY18 EBITDA to £119m-£120m, down from previous

guidance of £120m-£125m Earnings miss

(11.9%)

15 Jan 2019

• Announced FY’18 guidance update and EPS guidance slashed

from growth target of 8-10% to 7% due to significant downturn in

NHS volumes

Earnings miss /

Funding

pressure

(7.5%)

21 Jun 2018

• Announced the interim trading update indicating adjusted

EBITDA down by 8% due to outpatient tariff adjustments and

out-migration of care in Switzerland

Regulatory (17.0%)

17 Oct 2018

Sources Company information, Factset

• Adjusted Free Cash Flow was $380 million in 2016, below the

guidance outlook of $400 to $600 million, partially due to a

payment delay by the State of California

Earnings miss

/ Regulatory

(14.9%)

28 Feb 2017

• DoJ reported an investigation regarding keeping psychiatric

patients longer than necessary Regulatory

(11.9%)

7 Dec 2016

• EBITA Q4 2018 at SEK98m (-48% lower yoy) because of costs

for units in start-up / ramp-up phase and lower contribution from

outsourcing

Earnings miss (15.9%)

14 Feb 2019

6

Financial sponsors still like roll-up stories

Historically, rising active private M&A

markets have driven prices and lowered the

arbitrage as the price of add-ons have

increased

Sponsors have favoured M&A vs.

aggressive organic stories

While competing for platform assets is

becoming harder, investors are baking-in

future value creation in the upfront price

paid

Add-ons now account for c.50% of all

sponsor deals, 10 years ago it was only

c.33%

2

1

Sources Rothschild & Co estimates, Company information

3

4

Recent examples

Labs

Learning Disabilities

Specialist Schools

Pharma Services

MedTech

DONE

7

In the private markets, pricing has been supported by inward

investment from long-term investors attracted to asset backed

businesses

Selected recent Infrastructure / long-term capital fund transactions

2017

AMP Capital

2018

Antin

2017

Fremont

2017

Infravia

2017

AMP Capital

Two primary

care centres

in Ireland

2017

Jacobs Holding

2018

AMP Capital

2018

Antin

2018

iCON

2018

Infravia

2018

Core Equity

2017

Antin

Several large PEH funds

have launched long-term

buyout funds with 8-15

year investment

horizons

Healthcare social

infrastructure assets are

becoming increasingly

important for yield-

focused infrastructure

funds

Such investors are

making platform plays

which require more than

the typical c.5 year PEH

hold to integrate and

develop properly

1

2

3

DONE

Sources Rothschild & Co estimates, Company information

8

c.12x c.13x

c.18x

c.11x

c.14x c.13x c.13x

c.15x

c.13x

c.15x c.14x

c.12x c.12x

c.16x

c.14x

Lea

rnin

g D

isab

ilite

s

Lea

rnin

g D

isab

ilite

s

Inte

gra

ted C

are

Acute

Care

Acute

Care

Spe

cia

list C

are

Acute

Care

Denta

l

Acute

Care

Inte

gra

ted C

are

Inte

gra

ted C

are

Eld

erl

y

Spe

cia

list C

are

Denta

l

Lea

rnin

g D

isab

ilite

sSelected 2018 M&A deals in Healthcare Services5

Sources Company information, Rothschild & Co estimates

Notes

1. LTM multiple

2. Historic multiple

3. Current multiple

4. PF run-rate multiple

5. Enterprise Value greater than €150m

EV / Pricing EBITDA

1

4

2

2 2

1

2 2

2

2 2

3 2 3

1

9

1.15

1.20

1.25

1.30

1.35

1.40

1.45

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19

The effect of Brexit on FX rates is not predictable

12 January:

Dutch and

Spanish finance

ministers

support “soft"

Brexit

19 March: UK-

EU agree draft

Brexit transition

deal

24 January:

Mnuchin

says weak

USD good

for US

28 February:

EU presents

draft

withdrawal

agreement

16 April: FT

reports House

of Lords set to

vote to remain

in customs

union

27 April: UK

GDP weaker

than exp.; US

GDP stronger

than exp.

1 May: UK

Manufacturing

PMI weaker than

exp., sharp drop

in net consumer

credit

14 June:

Reaction to

FOMC hike

9 July: UK

Foreign

Secretary Boris

Johnson resigns

2 August BoE

hikes rates

25bp to 75bps,

Carney states

UK only needs

"modest"

tightening

6 August: UK

Trade Secretary

Liam Fox says

"no deal" is

more likely than

not

20 / 21

September EU

rejects UK’s

Chequers

proposal, PM

May states UK

and EU are long

ways apart on

key issues

1 November:

BoE keeps

interest rates

unchanged

15 November:

UK Brexit

Secretary Raab

resigns

10 December: PM

May delays

parliamentary vote

on withdrawal

agreement

7-Feb 2019: Bank of England U-turn

in policy, retreating from plans of

multiple interest rate rises

15-Jan 2019:

May’s Brexit

deal voted

down by 432

votes to 202

20 Dec-2019:

Federal Reserve

hikes US rate to

a range of 2.25-

2.50% from

2.00-2.25%

Source Factset as at 7 Feb 2019

A nervousness around sterling?

GBP/

USD

DONE

10

1513

76

11 108

12

64

2

6

4

1011

48

5

1

8

5

2

21

17 17 16 16

18

13

2

20

10

6

2

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18

Leveraged Loans HY Bonds

European Leveraged Finance market in 2018

A look back into the 2018 debt market

High levels of liquidity seeking yield

Front-of-market structures attainable, particularly in the loan market

Continued growth in cov-lite issuance

Increased volatility driven

by macro concerns

Risk-off approach from

investors

Numerous pulled

transactions

7.2%

354bps

3.7% 4.3%

233bps

2.0%

215bps

105bps

-82bps

Source Bloomberg

Q1 – Q3: Strong conditions favouring borrowers Q4: Weakening sentiment

and ‘correction’ across

Global markets

DONE

JPM Euro HY "B" Index JPM Euro HY "BB" Index iTraxx Xover Index# of

loans

11

5965

74 73

63

73 71 70

8278

104112

86

102

-

20

40

60

80

100

120

Q1 1

5

Q2 1

5

Q3 1

5

Q4 1

5

Q1 1

6

Q2 1

6

Q3 1

6

Q4 1

6

Q1 1

7

Q2 1

7

Q3 1

7

Q4 1

7

Q1 1

8

Q2 1

8

UK France Germany Other European

Leveraged loan new-issues Monthly / cumulative HY bonds Direct lending deal tracker

Strong lending volumes, but weaker than 2017 records

Volumes 32% down on 2017

– December was first month

without new issuance since 2005

13 high-yield deals pulled through

2018 (vs. two in 2017)

Yields rising back toward 2015

levels

Busiest for buyout loans since 2007

– Fewer re-pricings and recaps

Strong investor demand

underpinned by record CLO

issuance (up 33% from 2017)

Pricing remained low

Number of deals up 34% y-o-y

Average ticket sizes increasing,

supported by larger fund sizes

Pricing and minimum return

thresholds continue to reduce

– Some funds now offer ‘stretched

senior’ in the E+500 area

Sources LCD, Deloitte Direct lending tracker, Bloomberg

Favourable conditions continued

DONE

# of

deals

--

€10bn

€20bn

€30bn

€40bn

€50bn

€60bn

€70bn

€80bn

€90bn

€100bn

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

M&A Refinancing Other

--

€10bn

€20bn

€30bn

€40bn

€50bn

€60bn

€70bn

€80bn

€90bn

€100bn

--

€2bn

€4bn

€6bn

€8bn

€10bn

€12bn

Jan Mar May Jul Sep Nov

Monthly 2018 Cumulative 2018Cumulative 2017

12

250bps

350bps

450bps

550bps

650bps

750bps

2.5%

3.5%

4.5%

5.5%

6.5%

7.5%

Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19

JPM Euro HY "B" Index JPM Euro HY "BB" Index iTraxx Xover Index

Downward trend in yields returned on the back of new deal scarcity

Debt markets have had a slow but positive start to 2019

Institutional Loan market

reopening

Limited supply so far, primary

yields slightly higher than last

year

EQT backed IVC £1.2bn eq.

5.4x TLB at E/L+400/450 and

7.2x 2L at L+750bps

Limited deal launches have

increased the forward pipeline to

c.€5bn, including jumbo

transactions from RPC and EG

Group

Repeat issuers are able to

access HY Bond market, albeit

at a premium to 2018 pricing

Direct lenders remain keen to

capitalise on lull in capital

markets activity

1

2

3

Source Bloomberg

100bps 238bps

6.4%

102bps

123bps

78bps

316bps

3.1%

51bps

DONE

13

Credit funds now represents a deep and permanent pool of

alternate liquidity

Selected active European credit funds >75 active credit funds across

Europe

– Majority based in London

– Some funds have opened satellite

offices on the continent (Frankfurt,

Paris, Stockholm)

– Funds raised in €; mandate to

invest across Europe

– Hold levels can vary widely from

€10m - €500m+

– Predominantly focussed on mid-

market LBOs

Target companies with EBITDA of

€5m - €150m+

– Typically need at least one

financial covenant

For the majority, primary financing

solutions provided remains via a

unitranche / “stretched senior”

form

DONE

Sources Rothschild & Co estimates, Bloomberg

14

Q&A