The Sedgwick sale; What’s the deal?

Yesterday’s announcement that Sedgwick, the giant TPA, is about to be sold marks the end of a months-long process that has implications well beyond the sale of one company.
For starters, it’s good news for the TPA industry. Well, sort of.
The financials of the transaction are undoubtedly welcomed by the sellers, and on a broader scale, a positive sign for a work comp TPA industry that has been hammered by a long soft market and deep recession that has dramatically reduced claim volume. (TPAs typically are paid on a per-claim basis so fewer claims = lower revenues). The deal is a complex one, as Sedgwick has been owned by a consortium of several entities, and is being sold to another group of buyers. Primary owner Fidelity National will book $95 million in profit on the deal, and other owners, which includes health plan giant United HealthGroup, will likely enjoy similar gains.
The multiple looks to be about 5x earnings, which seems pretty solid given the industry (P&C claims and related services) although low compared to other recent deals (OneCall Medical, Fairpay Solutions). However, the OCM and FPS deals were fundamentally different transactions so comparisons aren’t appropriate. Sedgwick had almost $700 million in revenue back in 2008 and just a tad higher last year. My guess is that number will increase rather dramatically for 2010, largely due to new business and more revenue from existing customers.
And therein lies the tale.
There are two other realities that bear consideration. Both appear related to the sale process and the company’s operations going forward.
Some months, perhaps a year ago, word began to circulate among managed care vendors that Sedgwick was asking vendors to pay fees or commissions to the TPA if they wanted to provide services to Sedgwick clients. This practice is quite common in the comp world and if anything has become more prevalent of late as TPAs, hard-pressed by the soft market and declining claims fees, have looked high and low for other sources of revenue.
The issue lies in disclosure. As long as the TPA’s customers are aware of and agree to the arrangement it’s all good. Without clear and complete disclosure of the entirety of the financial relationship between the TPA and managed care (and other) service providers, customers may be unaware of the true ‘cost’ of their program and the reasons behind the selection of specific vendors. I don’t pretend to know the details of Sedgwick’s financial arrangements with each customer; I would expect Sedgwick has disclosed the nature and extent of these relationships to affected customers.
More recently, Sedgwick has brought on several new, very large customers, making it one of the rare claims organizations that has actually grown significantly. Word from several sources is Sedgwick’s sales approach has been, in a word, aggressive, especially in the area of price. With admin fees already close to an all-time low due to market pressures, Sedgwick’s uber-aggressive pricing is, according to several competitors, well under break-even. (this goes beyond complaints by disgruntled/frustrated competitors; these reports are from people who have been around long enough to be well past whining about lost business)
The implications are simple – did Sedgwick ‘buy’ business, or has it developed a more efficient, profitable model that enables it to under-price the competition while delivering service levels that are equal to those offered by the competition.
Regardless, TPA pricing and margins are not going to recover anytime soon. Therefore I’ll take back my opening statement; this will mean more adverse winds for TPA operators.
What does this mean for you?
My bet is the new owners, primarily private equity firms, are looking for Sedgwick to continue growing; they have a heavy debt burden (more than half of the deal is debt-financed).
Look for Sedgwick to be just-as-if-not-more competitive in the market tomorrow then it has been for the last six months.