GigCapital2’s SPAC Merger with 2 Health Companies Is Undervalued

GigCapital2 (NYSE:GIX) looks like a good value here. GIX stock has not moved much since it announced its three–way merger on Nov. 23, 2020. For example, as of today, the stock was at $10.03, which is 3 cents over the $10 price at which it valued its SPAC (special purpose acquisition company) merger. As it stands, that deal implies that GIX stock is worth about 55% more at $15.51 per share.

A 3D illustration of the word SPACs on a stock board full of numbers and up and down arrows.

Source: iQoncept/ShutterStock.com

The GigCapital2 SPAC merger is unique in that two different health companies will be merged.

The deal will merge with UpHealth, which is a leading digital healthcare provider. Simultaneously, Cloudbreak Health, a telemedicine and video medical interpretation firm, will be combined with these companies.. There will be an integrated global platform that works for all three companies in four fast-growing digital health markets. These are integrated care management, global telehealth, digital pharmacy, and tech-enabled behavioral health.

The merged company will use the new symbol “UPH” on the NYSE once the deal closes. The company filed an extension to have the deal close by no later than mid-June.

The Deal Transaction and Valuation

Based on page 45 of the deal slide presentation, the pro forma market value of the deal was based on 145.64 million shares outstanding. Therefore, at today’s price of $10.03, the pro forma equity market capitalization is $1.461 billion.

The company will receive a net of $105.5 million in cash after payments to the original selling shareholders as well as deal costs. As a result, the pro forma market enterprise value is $1.356 billion.

On page 32 of the slide presentation, UpHealth indicates that its pro forma 2021 revenue will be $194 million. Therefore, today the valuation using an Enterprise-to-sales (EV/Sales) ratio is 7.0 (i.e. $1.356 billion / $194 million).

This is very cheap compared to GigCapital2 / UpHealth’s present pro forma valuation. Fortunately, to aid us in this regard, the company updated its SPAC deal presentation on March 25. On page 50, the new deck has a current comparison with UpHealth’s present peers in the market.

For example, it shows a list of 10 other public health stocks that have an average multiple of 11.8 times EV/Sales. Today, GIX stock has a pro forma EV/Sales ratio of 7 times (see above). This implies that GIX stock EV should be 68.6% higher (i.e., 11.8 divided by 7.0).

However, to be more conservative, if we take the median rather than the mean of these 10 comps, the multiple will be 11. times. This implies that the Gix enterprise value should be $2.153 billion.

Adding back $105.5 million in cash (deducted in the EV calculation) the market value target is $$2.259 billion. And since there are going to be 145.64 million shares, the GIX stock price should be $15.51. That represents a potential gain of 55% over today’s GIX stock price of $10.01.

What To Do With GIX Stock

It is not like GIX stock does not deserve to be valued much higher. For example, page 49 of the updated slide deck indicates that the company expects to make EBITDA margins (earnings before interest, taxes, depreciation, and amortization) of 12.4%. This is much higher than the same peer group since their mean EBITDA margins are negative 3.9%. In fact, only three of the 10 peers have positive EBITDA margins as UpHealth will have in 2021.

Therefore, I suspect once the merger goes through before the end of June that GIX stock will move substantially higher. For example, analysts will likely come out with reports that point out the same valuation discrepancies that I have shown.

This might be a good time to accumulate some of the GIX stock shares, prior to the close of the three-way merger. There is a clear bargain element here and even if the stock rises somewhat the investor still has room to make money with higher-priced average purchases. This is based on our analysis which shows that GIX stock is worth $15.51 per share now, compared to its price today of $10.03.

On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


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