The statements that HealthEquity and WageWorks make in their public filings with the Securities and Exchange Commission (SEC) are forward-looking statements that may differ materially from actual results or events. Such statements are based on assumptions and are subject to known and unknown risks and uncertainties. Detailed information regarding these risks is provided in the SEC filings.
HealthEquity, the American health savings account administrator, has agreed to acquire WageWorks for $455 million. This transaction will add 580,000 accounts and $1.9 billion in assets. The combined company aims to generate $80 million in synergies by the end of fiscal 2022.
HealthEquity will gain access to the HSA market and will increase its distribution network through direct sales to employees and benefits advisors. It will also expand into complementary CDBs and HealthReimbursementArrangements, such as COBRA administration. The combined company expects to generate $50 million in annualized synergies, as well as significant operating efficiencies.
HealthEquity is heavily leveraged and may not be able to survive economic downturns. Its debt levels could put it at a competitive disadvantage. The company may also need to raise more capital to increase its earnings. However, this might not be feasible without a strong combination of health care reforms.
After its IPO, HealthEquity promised expanded profitability, a sustainable competitive advantage, and robust growth. It delivered on these promises, with 36% compound annual revenue growth and 1,600 basis points of adjusted EBITDA expansion. It topped analysts’ estimates for 20 consecutive quarters, and grew its HSA market share. But the company also faced a number of challenges.
One of the challenges HealthEquity faces is integrating WageWorks’ operations into its own. The transition may be difficult and may take longer than expected. HealthEquity may also have trouble retaining key employees. In addition, it may not be able to service debt associated with the transaction.
4.1 million HSA members
HealthEquity is one of the largest administrators of health savings accounts. The company serves 4.1 million HSA members and is an Internal Revenue Service-approved non-bank custodian. Its HSA accounts have grown by 21% annually and have a balance of about $1.9 billion. It also earns fees from asset under management fees.
The company has 115,000 employer groups as customers. About two-thirds of the customers are Fortune 100 companies. However, only about 5% of its client base is purchasing its full suite of products. HealthEquity expects its revenue to jump between 1.7x and four-times its current level in the next few years. This increase is expected to be even more significant once the number of HSA accounts rises and the HSA balances increase.
HealthEquity’s net income for the first quarter was $0.41 per share, up 32% from the same period last year. It beat Wall Street’s Q1 earnings estimate of $0.34 per share. During the first quarter of fiscal 2019, the company served 4.1 million HSA accounts. As of March 31, HealthEquity had 3.2 million active HSA members. The company’s custodial assets topped $8.3 billion, indicating that its business has a large addressable market.
HealthEquity’s HSA products are complemented by complementary services. The company manages over 4.1 million HSAs and 5 million FSAs through its direct-to-employer channels and through benefits advisors. Its combined revenue and cash flow growth is accelerating across all segments.
HealthEquity’s profits are derived from three primary sources. It earns service revenue from health plans and subscription revenues from employers. It also earns net income from its partnership with WageWorks, which runs consumer-directed health plans. In addition, the company acquired shares from WageWorks to boost its profit margins.
$8.3 billion in assets
HealthEquity is a leading provider of health savings accounts. Its mission is to connect consumers with their healthcare. HealthEquity works with over 45,000 employers and 141 benefit plan providers to deliver end-to-end health solutions. The company offers its members an award-winning “purple service” and an end-to-end platform that helps them become health consumers and build retirement savings.
HealthEquity has an impressive track record, with its net income beating consensus estimates for the past 16 quarters. It has a 5 year revenue CAGR of 36%, and a 20-quarter earnings growth rate of 8%. It has also steadily increased its market share in the HSA market, and currently has 13% market share in the HSA custodial business. It has 45,000 clients, 141 network partners, and more than 4.1 million HSA accounts under management.
HealthEquity makes money in three primary ways: custodial, interchange, and service revenue. By acquiring WageWorks, HealthEquity’s net income increased by $29 million. The deal would create a much larger administrator of employee benefits plans and consumer-directed health plans. Although HealthEquity and WageWorks are not certain to complete a merger, this could potentially be a good deal for the companies.
The WageWorks Health Equity acquisition was the largest in Utah since the purchase of Vivint Smart Home by Blackstone in 2012. The Utah investment community is now booming as Utah-based companies seek Silicon Valley valuations. In the near future, the volume of transaction activity will increase significantly.
Direct distribution to employers and benefits advisors
HealthEquity, the nation’s largest custodian of health savings accounts, is making a bid for WageWorks. The deal would create a larger administrator of health plans and consumer-directed health plans, including HSAs and complementary CDBs. It would also add a new product line, commuter accounts. However, the deal is still subject to regulatory approvals and other conditions.
While HealthEquity and WageWorks believe their expectations are reasonable, actual events or results could differ materially from these expectations. These differences are a result of known and unknown risks, uncertainties, and other factors. The companies have outlined these risks in their SEC filings.
HealthEquity plans to use the acquisition as a platform to expand its distribution channel, as well as its benefits offerings. It intends to use WageWorks’ strength in partnering with employers and benefits advisers. It expects to spend $2.3 billion on the acquisition, with $600 million in cash and $1.7 billion in new debt to fund the acquisition. The company is also expected to receive a $1 billion commitment from Wells Fargo & Co.