Amazon Inc. to Acquire One Medical for $18 per share in a $3.9bn Deal
Deal Overview
Acquirer: Amazon Inc (NASDAQ: AMZN)
Target: One Medical (NASDAQ: ONEM)
Total Transaction Size: $$3.9bn
Sector: Healthcare
Close Date: Undisclosed
Acquirer Advisors: Goldman Sachs
Target Advisors: Morgan Stanley & Co
On the 21st of July, Amazon Inc. (NASDAQ: AMZN) announced that it had agreed to acquire primary care provider One Medical (NASDAQ: ONEM) for $3.9bn (including net debt), in one of 2022’s biggest M&A transactions. Amazon agreed to pay $18 per share, which represents a 76.8% premium over One Medical’s closing price of $10.18 on the 20th of July.
Amazon Overview
Amazon Inc. (NASDAQ: AMZN) is one of the world’s leading e-commerce giants, engaging in the retail sale of consumer goods and subscriptions internationally. Amazon operates globally, with North America being its largest segment, accounting for 60% of the company’s net sales according to the company's Q4 2021 earnings reports. In North America, Amazon Prime as a subscription service is the primary revenue source for the segment. Similarly, Amazon’s International business consists of Amazon’s retail business for consumer products and subscriptions for internationally focused online stores. Amazon Web Services (AWS) provides an infrastructure platform in the cloud for a variety of solutions such as hosting applications and websites, providing enterprise IT, and content delivery. AWS accounts for about 13% of total net sales, being the only segment to post an operating profit in Q4 2021.
One Medical overview
1Life Healthcare Inc. (NASDAQ: ONEM) operates a membership-based primary healthcare platform under the One Medical brand. Its technology-powered membership platform provides seamless digital and in-office care, directly from the One Medial app. One Medical makes it easier for patients to schedule their appointments, renew prescriptions, and access up-to-date health records. It also offers its services as a benefit to over 8000 enterprise clients including Airbnb inc. and Alphabet Inc. One Medical acquired Iora Health in June 2021 for $2.1bn in an all-stock deal to further solidify its place in the primary healthcare market. One Medical made its debut on the NASDAQ in January 2020 at $14 per share. Shares soared by 58% to $22 on IPO day. Since then, the stock has seen highs of almost $60 in February 2021 after a strong performance during the pandemic. As of late, the stock has reached lows of $7 during the post-pandemic market turmoil and hot inflation measurements. With the acquisition announcement, the stock increased by almost 70% on July 21st.
Industry Overview
The healthcare technology market has boomed with the ever-increasing need for fast, accessible care in the post-pandemic world. COVID-19 had an explosive effect on the demand for telemedicine and online healthcare. The Health & Medical Insurance market in the US is worth around $1.1trn alone, the largest in the world. Due to the adoption of digitalisation in healthcare, advancements in network connectivity, and the integration of Artificial Intelligence (AI) and Machine Learning (ML), the HealthTech market is well placed as we enter a new era of automation.
Legacy healthcare and pharmaceutical companies have been participating in M&A in a bid to increase market share to compete with new and innovative Healthcare Technology companies such as One Medical. The US healthcare sector was robust in H1 2022 despite the macroeconomic headwinds. $94.4bn worth of deals were announced, half as much as 2021, but still firmly ahead of pre-pandemic levels. Some of the top deals include Pfizer’s acquisition of Biohaven Pharmaceuticals for $11.6 bn, UnitedHealth and Optum acquiring LHC for $6.1 bn.
Healthcare Technology has been widely adopted by some of the largest companies in the world. As an example, Apple Inc. has been innovating its new Apple Watches to take vital readings such as echocardiograms, heart rates, and blood oxygen levels. One of the main challenges in the HealthTech sector now, according to One Medical’s competitor DocGo, is the lack of data-sharing between providers. Patient data is not routinely shared across providers which causes largely avoidable delays and frustrations. Utilising blockchain technology could be a way forward for the industry to overcome these bumps in the road. Companies like Akiri and Medicalchain are already developing new and innovative ways around these problems.
Valuation Analysis
Using The Spark’s DCF model (sign up to our email subscription to gain free access to it here) to analyse One Medical’s present value regarding future cash flow proved interesting.
Our WACC was calculated as 10.2%. With interest rates in the US on the rise, we estimated the risk-free rate at 9% (inflation for August 2022 + 1%), One Medical’s Beta was 2.46, and the Cost of Debt was 4%.
Before Amazon sealed the deal to purchase One Medical, CVS Health was interested in acquiring the firm, which led to a bidding war between the two business powerhouses. “Party A” first offered $17 per share on June 1st and then increased it to $18 per share. Amazon made its first bid at $16 per share, before quickly increasing the bid to $18 to match the counterbid. A couple of days later, Bloomberg reported that CVS Health had been in takeover talks with One Medical but had bowed out of the discussions. This sequence of events suggests that Amazon may have had to overpay for One Medical to snub the deal away from CVS Health.
With negative operating income, Amazon has some serious work to do to turn One Medical into a profit-making business. Looking at the purchase of Whole Foods by Amazon for $13.7bn in 2017 can give us a better idea of how Amazon develops the businesses it buys. Whole Foods was hard hit by the pandemic but has shown a weaker-than-average recovery in terms of the number of visitors per store. Placer.ai found that the number of visits people make to Whole Foods is roughly the same as it was in 2017 before Amazon took over.
Hence, we have estimated a lower-than-expected revenue growth going forward for the first few years after the acquisition. The first objective of Amazon is to cut down on the operating losses One Medical is facing. Through the DCF, we estimate One Medical to be turning a profit with a positive EBIT starting in 2024. The DCF shows One Medical has an intrinsic value of $13.74, which is -23.7% less than the acquisition price of $18 and -20% from the current market price of $17.14.
Outlook and opinions
Strengths:
By acquiring One Medical, Amazon is expanding its online and virtual healthcare solutions to in-office services. Amazon’s foray into the healthcare sector began when it started offering its prescription drug delivery service through Amazon Pharmacy after acquiring PillPack for $750m in 2018. In 2019 Amazon launched Amazon Care which gives on-demand health advice and support. The "blending of virtual and in-person care is core to both One Medical and Amazon Care's strategy," said Citi analyst Daniel Grosslight. The deal will also now give Amazon 188 new medical offices across 25 different markets, as stated in recent reports.
Weaknesses:
When looking at One Medical’s financials, they are a loss-making company with 767,000 members and enterprise clients, compared to rivals Teladoc Health (NYSE: TDOC), which has more than 54 million paying members in the US and brings in double One Medical’s quarterly revenue. During the Pandemic, One Medical came under congressional investigation after reports that the company disobeyed guidelines for COVID-19 vaccines. The investigation showed that One Medical had taken advantage of “its access to scarce coronavirus vaccines to promote the company’s business interests” and pushed vaccine seekers to pay for its membership. The investigation also showed the company had prioritised friends and family for vaccinations.
Opportunities:
Amazon has always put customer experience first. Through this deal, they hope to do the same for their Healthcare services. Neil Lindsay, the senior VP of Amazon Health Services, said “We love inventing to make what should be easy easier and we want to be one of the companies that helps dramatically improve the healthcare experience over the next several years”. For years, Healthcare costs have risen faster than wages and inflation, which poses a real issue for companies committed to providing health insurance to their employees. By giving employees access to year-round consistent healthcare, employers and insurers believe they can prevent and minimise expensive hospital stays and chronic illnesses from leading to larger issues.
Threats:
U.S Senator Amy Klobuchar, who is also the Chairwoman of the Senate Judiciary Subcommittee on Competition Policy, Antitrust, and Consumer Rights urged the Federal Trade Commission (FTC) to investigate Amazon's proposed acquisition. She expressed concerns over the implications of the acquisition on personal health data. Grosslight said Amazon "does seem to have a target on its back, and the U.S. Department of Justice has been very aggressive in blocking deals recently”. With previous anticompetitive, concerns such as forcing small businesses on its site to buy its logistics services and using small businesses' private data to compete against them, this deal will definitely be under more scrutiny than usual.
I hope you enjoyed the article!
See you next month,
Andre
Disclaimer
This communication is for informational and educational purposes only and should not be taken nor used as investment advice, as a personal recommendation, or solicitation to buy or sell any financial instrument. This material has been prepared without considering any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or structured product are not, and should not be taken as, a reliable indicator of future performance. I assume no liability as to the accuracy or completeness of the content of this publication.