Left standing at the alter
The coming Teladoc Livongo merger is creating all sorts of speculation as to who will hook up with whom in the digital health space. Some clues could come from the proxy materials sent to Teladoc and Livongo shareholders which is available on the SEC web site. What caught our eye was the following passage;
“During the months of April through August of 2020, Teladoc management evaluated the potential acquisition of three large, privately-held companies in the virtual care space, which we refer to as Company A, Company B and Company C, as well as a merger with Livongo.”
It goes without saying Teladoc for legal reasons cannot reveal which companies were left standing at the alter but it would be fun to know why they chose Livongo over the others. Why they decided to pay $18.5 Billion for Livongo? Why they are asking their existing shareholders to approve a deal that will majorly dilute their holdings.
As per usual the financial advisors to each company have endorsed the deal rationalizing what can only be called a huge valuation on a relatively new company with a limited operating history and very interesting accounting methods. Yes we know that digital health is hotter than the California desert but seriously $18.5 Billion is a whopper of a valuation. Let’s face facts here these advisors would have endorsed this deal no matter what the valuation, funny how huge fees seem to do that.
Yet as we have noted in previous posts Teladoc could have easily entered the diabetes coaching space, and before we go any further we know that diabetes isn’t the only chronic disease Livongo is in it just accounts for 80% of their “revenue” so let’s just dispense with the BS about Livongo being in other chronic disease states, in much cheaper more cost efficient way. This is why it would be great to know who else Teladoc was looking at. Could it have been OneDrop which since this deal was announced has signed their own deal? Could it have been Cecelia Health, Omada or any of the other digital health players.
The real question shareholders of Teladoc should be asking but likely won’t be asking is why Livongo? Why $18.5 Billion? And why is my position being diluted? Ok that’s three question. The fact is Teladoc is paying an astronomical price and could well have buyer’s remorse a year from today. This is a COVID driven deal and no matter what crazy methods everyone uses to justify this deal without COVID this deal would have NEVER happened or at least not happened with Livongo being valued at $18.5 Billion.
To fully appreciate just how nuts this valuation is consider that Tandem has a market cap of just over $6 billion while Insulet carries a market cap of just over $14 billion. Want more craziness Teladoc could have paid a fraction of that $18.5 billion to acquire LifeScan which as we noted continues to throw off millions in free cash flow.
None of this will matter much as barring a major surprise shareholders will approval this deal. Digital health/telemedicine as long as COVID is here will remain hot. As per usual investors are ignoring many of the warning signs we have noted, and we are not just talking about Livongo’s very interesting accounting methods. This is what happens during a bubble, a bubble which continues to inflate.