TriZetto: Shelter from Scrutiny, Better Valuation

Orange County Business Journal, May 5-May 11, 2008 by Reed, Vita

HEALTHCARE: Software provider to insurers going private in $1.4 billion buyout; attracted 20 bidders

Getting out of Wall Street's glare likely was on the minds of executives at Newport Beach-based TriZetto Group Inc.

As recently as March, shares of TriZetto slumped after customer WellPoint Inc. warned that quarterly profits would fall short of expectations.

Some speculated TriZetto's claim processing software was a factor in WellPoint's warning. That rumor turned out to be wrong, but not before knocking off about 10% from TriZetto's market value.

The company's shares since have rebounded, with a market value of $900 million last week.

It's the type of gyration TriZetto won't have to deal with if a proposed buyout goes through. Last month, the company struck a $1.4 billion deal to be bought and go private with New York-based private equity investor Apax Partners Inc.

The deal's set to close in four to six months.

"Going private will give us greater flexibility in thinking about longer-term investments in product development, acquisitions and partnerships that will benefit our customers," Chief Executive Jeffrey Margolis said during the company's first-quarter earnings call last month.

There's also the valuation question: Some contend TriZetto was underappreciated on Wall Street. Apax's offer was 25% more than what TriZetto was trading at before the deal was announced.

"The operating environment is such that they're doing well, but the Street is not valuing them at an appropriate level, so they've chosen to accept this offer because of that," said K. Newton Juhng, an analyst with BB&T Capital Markets.

Another analyst, William Blair & Co.'s Corey Tobin, said he thinks the Apax deal still undervalues TriZetto.

"We view the valuation implied by this offer as on the lower side of what we would consider a peak multiple for a controlling interest in a firm with this many positive characteristics," he said.

TriZetto, with yearly sales of about $500 million, provides software and services to health plans and benefits administrators to help manage data. It also runs sites that allow patients, doctors and insurers to track healthcare information, appointments and claims.

The company wasn't looking to be acquired but received offers in December, a source familiar with TriZetto said. At that point, the company's board decided to test the waters and see if others might be interested.

It ended up with about 20 prospective buyers, the source said, including health insurers and software companies.

Going private likely appealed to TriZetto directors and executives, analysts said.

"In this market, a lot of companies, if they miss their quarter, they're hurt hard by the shareholders," said Leo Carpio of Cans & Co. "They can focus their energies on developing new services and products without investor scrutiny."

In late April, TriZetto reported $4.4 million in first-quarter profit, down 25% from a year earlier and below analysts' expectations of $5.6 million. TriZetto said the profit drop came on a 6% quarterly revenue slide to $108 million.

A source familiar with the company said TriZetto could be planning product pushes and other efforts that might impact future earnings per share, the number Wall Street fixates on.

The sale isn't expected to change things at TriZetto, which employs 30 people in Orange County and about 1,800 companywide.

Could Go Public Again

After a "fine tuning" under Apax, TriZetto could end up going public again or sell to another owner, analyst Carpio said.

And there's a concern with the deal: Some wonder if Apax will go through with the acquisition.

"Apparently, Apax Partners has backed out of deals in the past three years," Carpio said. "To ease investor concerns, the TriZetto acquisition deal contains significant breakup fees."

If the deal doesn't go through, Apax would have to pay TriZetto a $65 million termination fee, according to a filing with the Securities and Exchange Commission.

Two of TriZetto's customers, BlueCross BlueShield of Tennessee and the Regence Group, a Portland, Ore.-based health plan, are taking part in the deal with Apax and are set to be minority investors.

Even if Apax doesn't end up buying TriZetto, "new bidders will likely make a play," Carpio said.

San Francisco-based McKesson Corp., which distributes healthcare products and provides software to insurers, could be a possible acquirer, according to BB&T Capital Markets' Juhng.

Westport, Conn.-based IMS Health Inc., which TriZetto tried to buy eight years ago for $8.2 billion, isn't a likely suitor, according to Juhng.

TriZetto faces a shareholder lawsuit over the pending deal.

A few days after the deal was announced, Brian Felgoise, a suburban Philadelphia lawyer who has filed class-action lawsuits against companies such as San Diego-based Leap Wireless Inc., said in a release that his firm was suing TriZetto on behalf of shareholders who want to block the deal.

TriZetto anticipated the lawsuit, Margolis said on the company's earnings call.

"We will defend the company vigorously in this process against any lawsuits that might come up because we feel that the process we followed was in the best interest of the shareholders," Margolis said.