Class of 2020 | taizhang@wharton.upenn.edu

Team Health Holdings, Inc. (NYSE: TMH) has experienced a gigantic surge in market value after the Wall Street Journal published reports rumoring that both The Blackstone Group (NYSE:BX) and Bain Capital have expressed interest in buying out the company and restructuring, with a deal possibly materializing as early as this month. Team Health Holdings specializes in physician outsourcing services and has been seeking firms to take it private for a long while already after an unsuccessful IPO and shares on the market diluting its $1.6 billion purchase of IPC Healthcare. The sector that Team Health Holdings exist in is highly competitive and strongly reliant on mergers for survival. Several large firms dominate the industry, of which Team Health is the largest, but there are constant catalysts that can affect value, such as regulatory changes in the healthcare market or physician wage disagreements. These developments have led to lower analyst estimates and targets for the company, negatively affecting its value in the long run.

Some of the disappointing factors behind Team Health’s largely unsuccessful public offering include a deteriorating net income and lackluster return on equity. Despite these problems, however, Team Health’s rapid and aggressive expansion plan has already attracted plenty of interest from the private equity sector. Many look towards the company’s robust cash flows and revenue growth as indicators that a leveraged buyout (LBO) and restructuring could yield great gain in the mid-to-long term.

This is not the first time Team Health Holdings has been on Blackstone’s radar. Blackstone acquired Team Health for the first time in 2005 from Madison Dearborn for an undisclosed amount. It was actually Blackstone that first took the company public, with an IPO in 2009. Since then, Team Health has been focused on using mergers and acquisitions to expand its business, and the firm is now one of the largest suppliers of healthcare professionals anywhere in the world. Their expansion had been fueled by its IPO but missteps in capital allocation, strategy, and governance led to a severe decrease in shareholder value.

The background of Team Health is a unique one and it is unsurprising that Blackstone has expressed interest, alongside Bain Capital, in an exit strategy. The news of the potential buyout has buoyed stock prices, raising them by more than 16 percent in one trading day. Investor confidence in a private Team Health is high and analyst projections have been adjusted upwards after the Wall Street Journal first broke the news. If the rumored deal falls through, then Team Health’s current enterprise value of $4.8 billion could soar or sink depending on the actions that Blackstone and Bain takes with the company. One proposition that is not only very attractive but also innately powerful is the potential leadership redux that could come with a LBO. Inconsistent management and unclear leadership due to M&A agreements have hindered Team Health’s efficiency and weighed it down with bureaucracy. An example of managerial inconsistencies is when Team Health rebuffed an offer of acquisition from rival Amsurg in 2015, citing “the revised proposal was not in the best interest of Team Health and its stockholders.” Ironically, shareholders of Team Health became enraged at the news because of the necessity of consolidation in a highly competitive health market and demanded a reconsideration or negotiation. Nothing ever came out from the deal, which had severely overvalued Team Health at almost $69.32 a share, so stock prices suffered as a result. A buyout fromBlackstone could remedy this problem, but its unlikely that much, if any, information will be released publicly regarding the details of the deal. Confidence in this exit strategy is high because of Blackstone’s previous experience dealing with Team Health in 2005 and the potential value that a private equity partner could bring. In contrast, implications from this deal can result in a severe undervalue of Team Health, considering the rumors hover around a price target of $45 a share.

Should talks fall apart, there are widespread consequences for investors in Team Health. However, looking forward, taking Team Health private again could be a good move on the side of Blackstone, who seeks to increase the company’s current value by restructuring leadership and exploring further merger opportunities. The large economies of scale present in a market like physician outsourcing prevents entry of any major competitors, but new technologies could threaten these barriers to entry. Team Health’s rejection of a takeover bid just a year ago can also put these talks into jeopardy, and these risks should all be taken into account when evaluating the potential value of this deal.