The last regulatory hurdle from the federal government has been resolved, enabling a deal to go forward between McKesson and Change Healthcare to create a new healthcare IT company.
The Department of Justice has closed its review of the deal and terminated the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection with the deal. The department also terminated the waiting period for creation of the new company.
The Act is intended to allow federal review of mergers, tender offers or other acquisition transactions to ensure that proposed transactions don’t violate U.S. antitrust laws or could cause anti-competitive effects in the companies’ markets. Both companies are required to file a notification and report form with the Federal Trade Commission and the antitrust division of the Department of Justice.
The termination of the waiting period indicates that federal agencies have no further questions of the companies regarding their investigation of the deal.
McKesson is a healthcare services and information technology company; Change Healthcare, which formerly operated as Emdeon, offers a variety of services support consumer engagement and cost transparency. Emdeon’s background was as a major claims clearinghouse and revenue cycle management vendor.
McKesson and Change note that the transaction remains subject to other customary closing conditions, but once those are overcome, the acquisition is expected to close in the first half of 2017.
In late June, McKesson announced it was combining the majority of its Technology Solutions products—such as imaging, workflow, business performance services, connected care services, analytics and the Relay Health unit—with Change Healthcare to create a new company, the name of which has not been disclosed.
The move came as part of a series of moves by McKesson to exit many of its health information technology product lines. In June, McKesson announced it was exploring “strategic alternatives” for its Enterprise Information Solutions product line, which observers said represented the equivalent of putting out a “for sale” sign on its suite of hospital information systems, including the Paragon hospital information system, STAR and HealthQuest applications for financial and supply chain management, and document management and coding products.
These products include the Paragon hospital information system, STAR and HealthQuest applications for financial and supply chain management, and document management and coding products.
Under the proposed deal that was under federal review, Change Healthcare will contribute all of its businesses to the new company, except its pharmacy switch and prescription routing business, which will be owned by existing Change Healthcare shareholders. McKesson will own 70 percent of the new company. The remaining equity stake will be held by Change Healthcare stockholders, which include two major investment firms, Blackstone and Hellman & Friedman.
However, the McKesson ownership stake appears to be only a temporary one; the agreement provides that McKesson and Change will launch an initial public offering in the months following the close of the transaction, subject to market conditions. After the IPO, McKesson executives say they expect it to exit its investment in the new company in a tax-efficient manner.
McKesson leader John Hammergren will be chairman of the new company, and Change Healthcare leader Neil de Crescenzo will be the CEO.
The transaction will create a combined entity with $3.4 billion in pro forma combined total annual revenues for the fiscal year ended March 31, 2016. Change Healthcare and McKesson executives say they believe the combination will generate more than $150 million in “annual synergies” by the second year after the deal is closed, although they did not describe whether the synergies would represent increased revenue opportunities or reduced expenses.
The new company has received commitments for $6.1 billion of funded debt related to this transaction, with proceeds to be used to repay approximately $2.7 billion of existing Change Healthcare debt, make $1.25 billion in cash payments to McKesson, and make $1.75 billion in cash payments to Change Healthcare’s stockholders, with the remainder to be used for transaction-related expenses.
In essence, McKesson wants to substantially get out of the health information technology business, yet still make money off it, according to Alester Spears, principal and CEO at consulting firm Healthcare EDI Partners.
Earlier in 2016, McKesson sold its small business practice electronic health records and practice management product lines to ambulatory vendor e-MDs. The health information technology arena is changing with traditional financial lines not as profitable as they used to be, Spears notes. The future is provider-payer collaboration, care quality and analytics.
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