Why Evolent Health Is Tanking Today

Shares nose-dive after the company announces a surprise acquisition. Here's what investors need to know.

Brian Feroldi
Brian Feroldi
May 29, 2019 at 12:36PM
Health Care

What happened

Shares of Evolent Health (NYSE:EVH), a medical technology company focused on value-based care services and payment solutions, had dropped 26% as of 12:09 p.m. EST on Wednesday. The plunge is a response to the news that it is making an acquisition.

So what

Evolent Health announced that it has signed a deal to acquire an ownership interest in Passport Health Plan, which serves more than 300,000 Medicaid beneficiaries in Kentucky. The company also plans to expand the scope of its current agreement with the health plan. 

Here are the key details of the transaction:

  • Evolent will contribute $70 million for a 70% ownership interest in Passport Health Plan. It will also provide "interim balance sheet support if necessary to meet near-term regulatory capital requirements."
  • Passport will be jointly owned and operated through a partnership among Evolent, the University of LouisvilleUniversity of Louisville Physicians, University Medical Center, Jewish Heritage Fund for Excellence, Norton Healthcare, and the Louisville/Jefferson County Primary Care Association.
  • The plan will be governed by a newly formed board with joint representation from the current owners and Evolent Health.
  • Evolent will also expand its existing management services agreement (MSA) with Passport. This will include taking on additional responsibilities for day-to-day management of the health plan, including administrative, clinical, and financial operations and oversight.
  • The amended MSA will have a 10-year term.
  • The transaction is expected to close later this year.
Businessman With coins falling through his hands

Image source: Getty Images.

Evolent Health's CEO Frank Williams stated, "We strongly believe in Passport's mission and have been proud to partner with Passport's leadership team to serve the Commonwealth of Kentucky. We are honored by the vote of confidence the owners of Passport have given us to continue to build on an extraordinary legacy of delivering an excellent member experience to Kentucky's Medicaid beneficiaries."

Wall Street doesn't appear to share management's enthusiasm for the deal.

Now what

Management stated that this deal provides Evolent with "a clear line of sight to drive strong financial performance by the second half of this year." The company also believes that it will benefit greatly from Passport's scale and that the 10-year contract will drive "substantial top-line growth in the second half of 2019 and into 2020."

Investors will not find out if this deal leads to value creation for quite some time, but we do know that $70 million is a decent-size bet for a business that is currently losing money and sports a market cap of just $950.

With shares currently trading at a multiyear low, it is clear that Wall Street is skeptical that this deal will pay off for shareholders. My view is that taking a wait-and-see approach to this stock makes the most sense.