Benefytt Technologies (BFYT +0.00%) is an online insurance platform where consumers can shop for health insurance. The company announced in mid-July that it will be acquired by private equity firm Madison Dearborn Partners in an all-cash take-private transaction valued at $31 per share.
The company's stock price is considerably lower than it was two years ago -- is this a good time to sell?
A take-private buyout
In July, Benefytt announced a private equity-backed take-private deal. Take-private buyouts, also known as leveraged buyouts (LBO), are financial transactions where a private equity buyer -- in this case, Madison Dearborn -- acquires a company at an attractive price or a company it believes it can improve in the private market.
LBOs are notorious for the amount of debt raised and put on an acquired company, causing many companies to go bankrupt in the process. Unlike a deal with a competitor that may involve operational synergies, LBOs are primarily financial transactions where a buyer believes it is paying a good price or can finance a transaction cheaply with debt to make the deal math work.
Madison Dearborn is paying a 59% premium to Benefytt's 30-day average trading price. Taking a quick gain by accepting a buyout offer is always appealing to shareholders; however, Benefytt's stock price was much higher a couple of years ago. This makes one wonder if shareholders are getting the short end of the stick or if the company would be better off private.
Image source: Getty Images.
An unhealthy business?
Benefytt Technologies had a strong 2019. The company posted revenue of $381 million and income from operations of $48 million. The company had ambitions to grow sales at a double-digit rate in 2020 but the COVID-19 pandemic and changes to business strategy threw a wrench in those plans.
Historically, the company has posted strong revenue growth. From 2016 to 2018, it grew sales each year in excess of 30%. However, growth notably slowed in 2019 and cash flow was negatively impacted due to changes in the company's business strategy. Benefytt decided to focus on its Medicare insurance offerings and de-emphasize other types of insurance plans.
BFYT Revenue (TTM) data by YCharts
With revenue growth flattening out and business cash flows in decline, it is no wonder that the company's stock price hasn't performed well over the past couple of years. The stock may be cheaper than it was, but the business doesn't appear to be heading in the right direction. Perhaps a new owner can improve the state of the business.
Take the money and run
Just like Billy Joe and Bobbie Sue in the Steve Miller Band's hit single, shareholders should probably take the money and run. Benefytt's shareholders benefit from the 59% premium over where the stock traded a month ago. Furthermore, the uncertainty created by the COVID-19 pandemic makes this a dangerous time to own an insurance technology company with deteriorating financial results.
