In early July, we commented that Livongo was arguably one of the most attractive assets in the Digital Health and Nutrition Tech space and was likely to attract takeover interest. Well, we didn’t have to wait long to see some M&A action as Livongo and leading telemedicine player Teladoc announced their merger today in a transaction in which Livongo shareholders will receive Teladoc shares and some cash.
Livongo and Teladoc are both top 3 positions in our Digital Health portfolio, and Livongo is also our top position in our Food Revolution certificate. Both stocks are down today following the sharply negative reaction on Teladoc.
Even if we’re a bit underwhelmed by the low premium offered to Livongo shareholders, we believe the business combination makes sense from both a strategic and financial standpoint.
The combined Teladoc-Livongo will have a much broader offering covering prevention and detection through remote monitoring (Livongo’s focus) and virtual consultations (Teladoc’s focus), likely to make patients stick to the digital platform in the long run. Health data collected by Livongo could also be used during virtual consultations, contributing to the delivery of a comprehensive virtual care experience.
Further, the new Teladoc will arguably be well positioned in the future to offer a full digital health experience, one in which any detection of a health issue automatically schedules a (virtual) appointment with a physician.
From a financial standpoint, both companies are roughly at the same level of maturity, displaying positive EBITDA margins (10% pro forma in 2020). In the first year, the deal should be more than 20% EPS dilutive for Teladoc, explaining the stock price reaction today. But when factoring in the expected revenue and cost synergies, we get to a double digit EPS accretion over coming years. Also, given the digital business model of both companies, we would not be surprised to see the new Teladoc get to 30-40% margins in a near future, a level both companies will probably reach quicker together than alone.
In conclusion, the negative reaction on Teladoc today is quite understandable following the recent stock rally and the initial EPS dilution. That said, the announced transaction brings both strategic and financial merits that investors will hopefully acknowledge soon. We view Teladoc as the Amazon of healthcare, likely to offer a wide array of virtual care, remote monitoring and online pharmacy services in the future: the company has definitely made a major step in that direction with Livongo.