Breakingviews: Tough dealmaking conditions dull Waystar’s shine

Between a still-choppy market for stock-market listings and a dealmaking slump, buyout shops have few easy options to offload their investments. Waystar, whose backers include Canada Pension Plan Investment Board and EQT, is trying its luck with the initial public offering route. Last valued at $2.7 billion, the healthcare payments company is now eyeing a debut at nearly three times that figure, according to Reuters. With its deal-heavy growth strategy crimped by high interest rates, it’s likely the company’s best option, but the valuation looks aggressive.

Waystar provides software to handle billing and payments for healthcare providers, some three-fourths of whom still manage those functions in-house, TD Cowen analysts reckon, leaving plenty of potential customers to nab. Like many private equity-backed companies, Waystar also turbo-charged its expansion through acquisitions. It has struck eight deals since 2018, helping boost sales to $705 million last year, up 22% from 2021.

But that M&A splurge also helped saddle the company with $2.3 billion in debt. Even as Waystar enjoyed a 42% EBITDA margin in 2022 – nearly double public rival R1 RCM’s– it recorded a net loss of $44 million, in large part thanks to interest costs running at around 22% of revenue.

CPPIB and EQT acquired a majority stake from Bain in 2019, which formed Waystar through a merger in 2017; all are likely itching for an exit. Normally, that might argue for a quick sale, especially given that post-debut slumps for the likes of Instacart and Klaviyo indicate stock-market investors are still cautious on new listings. But fellow private-equity firms have pulled back dramatically on dealmaking, while the company’s debt burden makes larding yet more leverage on for a new buyout difficult. Potential industry acquirers, like Epic Systems or Oracle-owned Cerner, are more conservative on deals or still dealing with their own post-merger integration, respectively.

That leaves an IPO as the best option. A listing could raise money for speedier debt repayment and allow the company to fund future deals with stock. And Waystar’s relatively high EBITDA margin and niche positioning could justify a premium. But assuming EBITDA finishes this year at $332 million, double results in the first half, an $8 billion valuation target would represent a chunky 24 times that figure, well north of R1’s 8 times multiple or the roughly 15 times insurer UnitedHealth paid for competitor Change Healthcare in 2021. Even if Waystar has to trim its expectations, though, success here would offer hope to other buyout backers stuck in aging investments.