Alcidion (ASX:ALC) Acquires Silverlink Software, Raises Capital At 25c Per Share

Earlier in the week hospital software supplier Alcidion announced that it would buy Patient Administration System provider Silverlink Software for $55 million, which is about 7.5 times recurring revenue. In order to fund the transaction, Alcidion announced a pro-rata rights issue at 25 cents per share, which will entitle shareholders to buy one new share for every 10.5 shares they hold. Let’s break it down quickly.

Is Silverlink A Good Acquisition For Alcidion?

As you can see below, Silverlink derives about $7.4 million in recurring revenue from its patient care system, which is designed to manage the administrative aspects of patient care delivery such as patient identity management, and attendance details. Unfortunately, it hasn’t really been growing, which probably indicates that its product is not particularly compelling or its sales team is hopeless, or some other difficulty. That’s definitely the worst aspect of this acquisition.

Now, the good aspect of it is that the company is already EBITDA positive and should not become a cash drain on the company. Previously, I noted that the company said it would make a profit in FY 2023. This morning, I asked the Alcidion CEO Kate Quirke how this acquisition would impact the plan for breakeven in FY 2022 and profitability and free cash flow in FY 2023. She said that “The acquisition of Silverlink should contribute approximately $2.4M of EBITDA to FY22, according to Silverlink forecasts. Thereby making a positive contribution to Alcidion achieving profitability in FY22. Our objective is to continue to deliver cash flow positive outcomes even as we invest in the ongoing development of the product suite.”

It is crucially important that Silverlink is not intended to damage Alcidion’s ability to sustain its own business. In the next two years, we are going to find out whether Alcidion is truly a high quality business that can make profits and grow, or not. It is definitely possibly that the company could be addicted to burning cash, like so many others. That doesn’t mean its bad, but it definitely means that it is lower quality than software businesses that make profits and grow, simultaneously.

All in all, I’m satisfied that this acquisition shouldn’t bring too much risk, so that’s a positive.

Why Did Alcidion Acquire Silverlink Instead Of Growing Organically?

Whenever a company makes a strategic acquisition, you have to identify the pre-existing shortcoming that the acquisition is designed to fix. Happily, the company has done a good job explaining the situation, even if the situation isn’t ideal.

As I understand it, this acquisition is strategic because “several NHS Trusts (new & existing) have approached Alcidion regarding a larger EPR offering leveraging Miya as the core architecture.” However, if we dig a little deeper, we see that the truth of the matter is that the company was unable to bid on some opportunities, because they did not have a PAS to offer alongside Miya. In those scenarios, the entire field was forfeited to larger vertically integrated US companies.

However, it seems the company has been tuned into where the money is flowing, in the NHS. Specifically, it seems this acquisition is designed to strengthen Alcidion’s ability to participate in the “Digital Aspirant programme”. To quote the government website:

“In February 2020, 23 NHS trusts were named as the first sites for the Digital Aspirant programme. An additional four trusts joined the first wave during 2020. They will each receive up to £6m over the duration of the programme to help deliver their digital ambitions. In March 2021 an additional 32 trusts joined the programme. Seven of these will also receive up to £6m over the next three years, while the remaining 25 are receiving funding of £250,000 to develop their digital strategy and business case.”

Reading between the lines, it seems that this programme is supposed to favour modular systems like Silverlink and Miya, which follow an open or deconstructed model. This allows different “best of breed” software providers to work together to provide different parts of the software stack. The reason that healthcare systems around the world are moving to a more deconstrcted model is that it allows them to switch out parts of the system, if those providers are not offering competitive pricing. Retaining this bargaining power usually provides better value than buying a single vertically integrated system which then locks the patient data into that system, and makes it hard to integrate.

To quote the CEO, Silverlink is “one of the few PAS that openly allows two way integration”.

So, framed in the negative, this acquisition allows Alcidion to bid for larger projects that it was otherwise missing out on.

And framed in the positive, this acquisition is an example of Alcidion “skating to where the puck is going.”

Is The Alcidion Capital Raising Unfair?

A fair few people have mentioned that it is disappointing for Alcidion to raise capital at 25 cents, which is significantly below the prevailing share price. However, I note that every shareholder is given the opportunity to buy shares at the same price, in the same proportion. That means, it’s only a slightly unfair raising, since all shareholders can participate in the capital raise.

It is a little bit unfair for shareholders who do not want to participate, but they can sell some shares and participate, to cash out some profit, but retain the same number of shares.

Edit: It is also a bit unfair because new shareholders will be able to buy in at a discounted price, through the institutional raising. That means existing shareholders will be slightly diluted, even if they take up their rights.

I’m not thrilled with the low price of the raising. But on the other hand, the company has made some effort to include all shareholders, and this was a reasonably large raise, which perhaps explains the need for the discount. Of course, it would be better if the company had just raised more at 32 cents, when they had the opportunity! Overall, though, this seems like a reasonable attempt at getting a large raising up and running on short notice.

Should I Participate In The Alcidion Capital Raising?

Just last week I explained that I was in the mood to buy more Alcidion shares, since it finally signed its largest ever contract in Australia. At current prices, Alcidion is definitely a high growth optimistically priced stock, so it could definitely fall a lot further. For that reason, I only had a small holding, which I was hoping to add to, on share price weakness. As it happens, I had an order in at below the current price.

Due to this capital raising announcement, I have cancelled my market order and will likely just buy shares in the capital raising at 25 cents each, instead.

Zooming out, I’m a little bit worried that Alcidion is paying for a company that isn’t growing on its own, but I also want the company to swing for the fences, since I believe that the intersection of healthcare and software is a wonderful industry to operate in, and that such companies will be much more important in 10 years, than they are today.

After this acquisition, Alcidion should have a revenue run rate of about $40 million or more (noting that actual revenue in FY 2022 will be lower, due to only a partial contribution from Silverlink). At a share price of 30 cents, it will have a market capitalisation of around $400 million, which puts it on about 10x revenue.

One fear I have is that acquiring Silverlink will slow the company’s growth rate, and require significant technical spend to integrate and move it to the cloud. Specifically, the CEO said that combining Miya with Silverlink will ultimately deliver a cloud native modern and modular electronic patient record that will rival the global incumbents. That’s a good ambition, but it will require strong technical leadership and a good team to effectively compete on a bigger stage.

Longer term, I have to say that I think that Alcidion is taking the right approach to have a modular and deconstructed approach to the sector. Over the last decade, healthcare administrators have woken up to the terrible inertia that comes about when you go to a single, non modular provider, which then locks you in to all its systems.

At the end of this acquisition process, Alcidion will still have $20 million in cash and will aim to be self sustaining by FY 2023 at the latest. My thesis still holds that achieving these goals would make it an attractive business to own, and that is arguably even more true now that the company will have a presence in around a quarter of NHS trusts. Arguably, this will make it more of a trusted partner and will allow it to sell more products to existing clients, and win new NHS trusts more easily. Here at home in Australia, shareholders will be hoping the company will enhance its reputation by successfully implementing the recent win with the Department of Defence.

Please remember that these are personal reflections about a stock by author. I own shares in Alcidion, and currently intend to participate in the capital raising at 25 cents per share. However, I will not sell my Alcidion shares for at least 2 days after this article is published. This article should not form the basis of an investment decision. It is an investment diary valuable only for the cognitive process it demonstrates. We do not provide financial advice, and any commentary is general in nature. Please read our disclaimer.

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