Tough dealmaking conditions dull Waystar’s shine

Klaviyo

31/10/2023 14:51

(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
    By Anita Ramaswamy
       NEW YORK, Oct 31 (Reuters Breakingviews) - Between a
still-choppy market for stock-market listings and a dealmaking
slump, buyout shops have few easy options to offload their
investments. Waystar, whose backers include Canada Pension Plan
Investment Board and EQT  EQTAB.ST , is trying its luck with the
initial public offering route. Last valued at $2.7 billion, the
healthcare payments company is now eyeing a debut at nearly
three times that figure, according to Reuters. With its
deal-heavy growth strategy crimped by high interest rates, it’s
likely the company’s best option, but the valuation looks
aggressive.
    Waystar provides software to handle billing and payments for
healthcare providers, some three-fourths of whom still manage
those functions in-house, TD Cowen analysts reckon, leaving
plenty of potential customers to nab. Like many private
equity-backed companies, Waystar also turbo-charged its
expansion through acquisitions. It has struck eight deals since
2018, helping boost sales to $705 million last year, up 22% from
2021.
    But that M&A splurge also helped saddle the company with
$2.3 billion in debt. Even as Waystar enjoyed a 42% EBITDA
margin in 2022 – nearly double public rival R1 RCM’s  RCM.O  –
it recorded a net loss of $44 million, in large part thanks to
interest costs running at around 22% of revenue.
    CPPIB and EQT acquired a majority stake from Bain in 2019,
which formed Waystar through a merger in 2017; all are likely
itching for an exit. Normally, that might argue for a quick
sale, especially given that post-debut slumps for the likes of
Instacart  CART.O  and Klaviyo  KVYO.N  indicate stock-market
investors are still cautious on new listings. But fellow
private-equity firms have pulled back dramatically on
dealmaking, while the company’s debt burden makes larding yet
more leverage on for a new buyout difficult. Potential industry
acquirers, like Epic Systems or Oracle  ORCL.N  -owned Cerner,
are more conservative on deals or still dealing with their own
post-merger integration, respectively.
    That leaves an IPO as the best option. A listing could raise
money for speedier debt repayment and allow the company to fund
future deals with stock. And Waystar’s relatively high EBITDA
margin and niche positioning could justify a premium. But
assuming EBITDA finishes this year at $332 million, double
results in the first half, an $8 billion valuation target would
represent a chunky 24 times that figure, well north of R1’s 8
times multiple or the roughly 15 times insurer UnitedHealth
 UNH.N  paid for competitor Change Healthcare in 2021. Even if
Waystar has to trim its expectations, though, success here would
offer hope to other buyout backers stuck in aging investments.
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    CONTEXT NEWS
Healthcare payments company Waystar made its filing for an
initial public offering available to the public on Oct. 16.
    Its owners, which include buyout firm EQT and Canada Pension
Plan Investment Board, have selected a group of banks led by
JPMorgan, Goldman Sachs and Barclays to underwrite the listing.
The company is eyeing a valuation of as much as $8 billion,
Reuters reported.

 (Editing by Jonathan Guilford and Sharon Lam)
 ((anita.ramaswamy@thomsonreuters.com))