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R1 RCM Buys Recovery Solutions Specialist for $4.1bn

Updated: Oct 30, 2023


Acquisition Overview


On January 10th, healthcare revenue management firm R1 RCM (RCM:NSQ) announced an agreement to buy Atlanta-based Cloudmed in an all-stock deal. This deal will allow R1 RCM to accelerate the implementation of their strategy of building a more scalable and flexible platform for consumer engagement in healthcare by leveraging the cloud-based capabilities and customer base of Cloudmed.


Deal Structure


The acquisition values Cloudmed at approximately $4.1bn including $857mn of net debt based on R1’s closing stock price on January 7, 2022. Upon the closing of the transaction current R1 shareholder will hold 70% of the combined company on a fully diluted basis and equity holders of Cloudmed will own approximately 30%. This valuation reflects the average client ROI of 3-5x from Cloudmed in 2021, whilst recovering over $1.5bn of underpaid or unidentified revenue for customers. Cloudmed equity holders will enter an 18-month lockup agreement which is subject to partial early release after six months under certain conditions. The deal is expected to close in Q2 of 2022 subject to the approval of the stock issuance by R1 shareholders, regulatory approvals, and other customary closing conditions.


Centreview Group and J.P. Morgan acted as financial advisors to R1 RCM, and Barclays acted as financial advisors to Cloudmed


R1 RCM Overview


R1 RCM is an American revenue cycle management (RCM) company that provides sustainable, technology-driven solutions that aim to transform the financial performance of hospitals, health care systems and physician groups. Its primary service offering consists of end-to-end RCM services for healthcare providers, but it also offers modular services which allow customers to engage for only specific components of its end-to-end RCM service offering. Its physician advisory service assists healthcare providers in acting in accordance with payer requirements regarding whether to classify a hospital visit as an out-patient or an in-patient observation case for billing purposes.


Founded: 2003

Number of employees: 19,000

EV: $6.78bn

LTM Revenue: $1.40bn

LTM EBITDA: $340mn

Market Cap: $6.1bn


Cloudmed Overview


Cloudmed, a New Mountain Capital portfolio company, is a leading national provider of technology-enabled recovery solutions for healthcare providers. They serve over 3100 organisations including 47 of the top 50 healthcare systems in the U.S.A. The company specializes in using cloud-based data architecture to automate the analysis of large volumes of medical records, payment data, and complex insurance models. Annually they help to recover over $1.2bn of underpaid or unidentified revenue annually for its clients. Cloudmed was acquired by New Mountain Capital in December 2017 due to the firm’s focus on the theme of healthcare technology-enabled companies.


Founded: 1996

Number of employees: 1000

EV: N/A

LTM Revenue: $340mn

LTM EBITDA: $161mn

Market Cap: N/A


Industry Insight


This deal follows the $28.3bn acquisition of Cerner by Oracle in a substantial move towards the modernisation of electronic health records (EHR). According to BDO’s healthcare digital transformation survey, 93% of healthcare organisations have or are developing a digital transformation strategy including technology such as cloud computing, 5G, artificial intelligence and the blockchain. COVID-19 has accentuated the requirement of healthcare providers to adopt digital-based technologies with investment in telehealth rising from 42 percent in 2020 to 75 percent in 2021. The accelerated adoption of modern technology in the healthcare industry has led to the greater interest of organisations in both vertical and horizontal integration to bolster their digital and technological capabilities with a large focus on cloud computing as demonstrated by the transactions completed by Oracle and R1 RCM.


The wider healthcare industry has seen an increase in dealmaking which sees no sign of slowing down. Deal volume and value increased between 2020 and 2021 by 32% and 65% respectively according to a report by PWC. This growth is expected to continue into 2022 due to three driving factors being portfolio optimisation, digitalisation of the patient experience and environmental, social and governance (ESG) considerations. Cross border M&A will also continue to grow as companies strive to become global healthcare platforms rather than country-specific organisations.


As well as the overall increase in activity within the sector with companies such as GlaxoSmithKline, Johnson & Johnson, and Sanofi announced plans to spin-off their consumer healthcare businesses into separately listed companies which will allow them to become significant M&A players.


However, there are regulatory concerns that are causing investors to be wary. The US Federal Trade Commission is focusing on antitrust regulations that may prevent larger deals within the sector from going ahead in 2022. Alongside this, there are proposed pricing reform legislation that could potentially have a negative impact on the cashflows available to companies to invest in M&A.


Strategic Rationale


There are three main driving factors behind this $4.1bn deal: The advancement of end-to-end RCM, diversification of operations and customer base as well as the financial benefits that R1 RCM will receive.


Firstly, the combination creates a leader within both end-to-end RCM and technology-driven revenue intelligence. With Cloudmed’s ability to recover over $1.2bn of underpaid or unidentified revenue annually and having the #1 KLAS rating in the revenue integrity/underpayment services provider category in 2021 the combination of decades of experience will accelerate the progress of the digitalisation of client services using cloud computing, artificial intelligence, and automation. The path to a more modernised healthcare system will be advanced by the combined capabilities of Cloudmed and RCM R1.


With regards to customer base, R1 RCM will benefit through this acquisition as they will now have access to 47 of the 50 largest healthcare providers in the US in addition to a further 3100 organisations. As well as a larger customer base the company will now have more diversified capabilities with the cloud technology that Cloudmed provides, in addition to a greater capacity that will enable the company to drive growth in modular revenue. Cloud computing will allow R1 RCM to scale up their operations including automation and analysis within revenue cycles that have in the past operated using many different IT systems thus improving the efficiency of R1 RCM.


Another factor behind the transaction is the financial benefits R1 RCM is expected to receive post-close. By the end of year three R1 RCM are expected to have estimated cost synergies of $85mn which could reach up to $98mn. In addition to this, the company are expected to receive substantial revenue synergies over time and expects to have 2.7x net leverage upon closing of the transaction.


Long-term Prospects


The lack of skilled workers within the healthcare industry, which has been exacerbated by the pandemic, has put a much larger focus on the future of digital healthcare systems to make up for the gap that has been created. The unlock significant value within markets organisations must embrace the digitalisation of their operations which R1 RCM is seen to be doing through the acquisition of Cloudmed. The focus on improving productivity and consolidating fragmented private clinics and specialist healthcare providers will continue to drive M&A within the sector. This transaction is a step in the right direction for R1 RCM as they continue to strive to digitalise the healthcare sector and will allow the company to compete in the wider RCM industry more successfully.


Written by Usmaan Nadeem (St Edmund Hall, University of Oxford)

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