R1 RCM (NASDAQ:RCM) shares rose 4.7% on Thursday following speculation by Jefferies that the company could become a target for private equity buyers.
This comes amidst a series of announcements and news that have contributed to the shares' volatility and impacted investor confidence in RCM.
“We believe this level of growth, cash flow, and valuation put the company on PE radar screens,” analysts said in a note.
Jefferies points out that RCM, characterized by its growth, attractive margins, and robust cash flows, might be more suited as a private entity in the near term.
“Given RCM’s relatively healthy balance sheet (~3x levered), we believe R1 screens as a potential LBO candidate. We continue to believe this is a good biz with LT tailwinds, but given the inherent volatility in the biz, we believe it could be better served as a private co in NT,” analysts added.
Given the current trading of RCM's shares at approximately 25% below their historical average, along with significant free cash flow and reasonable leverage, Jefferies' leveraged buyout (LBO) analysis indicates that a potential acquisition could yield an internal rate of return (IRR) exceeding 20% over a five-year period for a buyer.
The price target implies an upside of more than 75% based on yesterday’s closing price.