Why R1 RCM (RCM) Is Buying Cloudmed For $4.1 Billion

By Amit Chowdhry ● Jan 10, 2022
  • R1 RCM Inc. (NASDAQ: RCM) announced it is buying Cloudmed for $4.1 billion. These are the details.

R1 RCM Inc. (NASDAQ: RCM) — a leading provider of technology-driven solutions that transform the patient experience and financial performance of healthcare providers — recently announced that it has entered into a definitive agreement to buy Cloudmed, a leader in Revenue Intelligence solutions for healthcare providers, in an all-stock transaction. The deal values Cloudmed at approximately $4.1 billion, including $857 million of net debt, based on R1’s closing stock price on January 7, 2022.

Based in Atlanta, Cloudmed serves over 400 of the largest health systems in the United States, including 47 of the top 50 hospital systems. And Cloudmed’s revenue intelligence platform combines cloud-based data architecture and deep domain expertise with intelligent automation to analyze large volumes of medical records, payment data, and complex medical insurance models to identify opportunities to deliver additional revenue to customers. Last year, Cloudmed recovered more than $1.5 billion of underpaid or unidentified revenue for customers, delivering an average client ROI of 3-5x.

Strategic/Financial Benefits

1.) The combination creates a scaled leader across both end-to-end revenue cycle management and technology-driven revenue intelligence. And Cloudmed brings market-leading capabilities in revenue integrity with a focus on the middle revenue cycle and the #1 KLAS rating in the Revenue Integrity/Underpayment Services Provider category in 2021. Together, R1 and Cloudmed will have enhanced offerings that unite decades of coding, charging, and reimbursement expertise to drive further client digitization through automation and AI.

2.) This deal will enable R1 to further its ability to deliver transformative value to healthcare providers through a more fulsome platform of differentiated capabilities. With this increased commercial capacity, R1 will drive growth in modular revenue at SaaS equivalent margins. And the combined company will have a diversified customer base with well-established relationships across 50 states, including 47 of the top 50 healthcare systems.

3.) The deal is expected to be accretive to R1’s earnings per share in the first full year post-closing. R1 expects to unlock cost synergies of $85 million by the end of year three and $98 million at full run-rate, as well as significant revenue synergies over time. R1 expects to have approximately 2.7x net leverage upon closing of the transaction and anticipates strong cash flow generation post-close.

Upon closing of the deal, the current R1 shareholders will own approximately 70% of the combined company on a fully diluted basis and Cloudmed equity holders will own approximately 30%. Cloudmed equity holders will enter into an 18-month lockup agreement, subject to partial early release after six months under certain circumstances.

The deal, which has been unanimously approved by the Boards of Directors of both companies, is expected to close in the second quarter of 2022, subject to the approval of the stock issuance by R1 shareholders, receipt of regulatory approvals, and the satisfaction of other customary closing conditions.

Joe Flanagan (CEO of R1) will serve as CEO of the combined company and Lee Rivas (chief executive officer of Cloudmed) will serve as president of the combined company. Upon closing of the transaction, R1 is going to increase the size of its Board of Directors to include 3 new board members nominated by New Mountain Capital.

KEY QUOTES:

“This transaction accelerates our strategy to build the most scalable, flexible, and integrated platform for the revenue cycle and consumer engagement in healthcare. Our combined solutions, including enhanced automation capabilities, will further transform the patient experience and drive continued improvement in our customers’ financial results. I look forward to working with Cloudmed’s CEO, Lee Rivas, and the entire Cloudmed team whose additive talent and expertise will help us continue to optimize outcomes for healthcare systems and create value for all our stakeholders.”

— Joe Flanagan, president and chief executive officer of R1

“Cloudmed solves a critical problem in the healthcare system by helping healthcare providers get paid for the services they deliver. By combining with R1, we will be creating a best-in-class platform with market-leading capabilities to drive improved outcomes for our customers, among the leading healthcare providers in the country. R1 shares our values and focus on innovation, which is why we are so excited about joining them to drive value for healthcare providers.”

— Lee Rivas, chief executive officer of Cloudmed

“We believe the combination of Cloudmed and R1 creates a clear market leader for technology and data powered revenue management for healthcare providers. We are excited to support the long-term vision of the combined company to modernize the U.S. healthcare sector. We look forward to working with Joe, Lee, and the management teams to fulfill this mission.”

— Matt Holt, managing director and president, private equity of New Mountain Capital