Written by Savanna Ganyard, CFA; Joshua Miner; Chance Sherer, CVA; and William Teague, CFA, CVA
Cano Health, Inc., headquartered in Florida, is a value-based care delivery platform that specializes in primary care for seniors. In February 2024, Cano announced it would enter a reorganization process under Chapter 11 bankruptcy. Less than six months later, on June 28, 2024, the company announced a successful conclusion of its court-supervised restructuring. The company, now private, is looking forward to a brighter future under a more focused strategy.
Background
Founded in 2009, Cano began developing its core business as a value-based provider in Florida. The company employs a capitated care model and places a large focus on preventative care and accessibility. The company’s membership is largely comprised of Medicare Advantage, Medicaid, and ACO REACH. As Cano grew, it added complementary service offerings, such as a care management program, a prescription program, and in-home medical visits. These services were meant to prevent hospital admissions and readmissions, increasing Cano’s revenue while decreasing patient total cost of care in the capitated care model.
To further drive growth, the company began to pursue an aggressive policy of expansion through de novo development, acquisitions, and affiliations. The company grew from two markets and 13,700 members in 2017 to 15 markets and 106,000 members by 2020.
In 2021, the company went public in a $4.4 billion merger with a special purpose acquisition company (SPAC) that provided $1 billion in cash proceeds to the company. After going public, Cano continued to fuel growth through acquisitions. In 2021, the company acquired Miami-based University Health Care in a $600 million deal and Doctors Medical Center in a $300 million deal. The company added five states and 121,000 members in 2021, resulting in a total of nine states and 227,000 members. The company continued this growth throughout 2022, ending the year in 10 states and with 310,000 members.
However, in these years of high growth following going public, the anticipated benefits of these acquisitions did not materialize. The company was also affected by industry and regulatory headwinds, including increasing third-party medical costs and a looming Medicare Risk Adjustment Model (V28). On top of these issues, Cano continued to add debt and fell behind on debt repayments. Throughout 2022 and 2023, Cano reported significant losses and an accumulation of $1.2 billion in debt. For context, the company had $1 billion in assets as of December 31, 2023.
In February 2023, Cano entered into a side-car credit agreement with certain lenders. At the end of March 2023, the company’s market capitalization had decreased 90% from its price at the time of its SPAC merger. In April 2023, three board members resigned in protest of company decisions and performance. A couple of months later, the CEO, Marlow Hernandez, stepped down after pressure from shareholders and the former board.
In an attempt improve the company’s performance and cover its liabilities, Cano began to divest its assets. The divestment process began in 2023 prior to the Chapter 11 filing, when the company sold its entire Texas and Nevada portfolio to CenterWell Senior Primary Care, a Humana subsidiary. The net proceeds of the transaction were utilized to pay down debt.
During the second half of 2023, the company also closed medical centers and exited operations in California, New Mexico, and Illinois. These three states represented approximately 5,000 members and 17 medical centers. The company received $19.9 million for the divestiture of certain specialty practices in Florida and assets located in California and Illinois, the net proceeds of which were used as working capital. Cano closed the remaining medical centers in these three states. Finally, Cano successfully exited operations in Puerto Rico at the beginning of 2024.
Despite these transformation efforts, Cano entered into voluntary Chapter 11 proceedings and a Restructuring Support Agreement with most of its lenders in February 2024. The agreement’s primary goal was to reduce debt and position the company for long-term success through cost-cutting measures.
Reorganization
In July 2024, Cano emerged from Chapter 11 as a reorganized private company. The company successfully reduced its debt burden by $1 billion by converting it into equity in the form of common stock and warrants. Additionally, existing investors have contributed an additional $200 million investment to support business operations.
Furthermore, Cano exited its underperforming markets, choosing to focus on its core Florida market. During the bankruptcy process, the court allowed Cano to reject 72 leases in six states. These were sites of offices and medical centers that the company no longer uses.
As established during proceedings, the company’s operational strategy going forward centers around optimizing cost and continuing to evaluate asset performance. To date, Cano is on track to achieve $290 million in cost reductions by the end of 2024. Key drivers of this cost reduction include negotiating with payers, reducing operating costs through decreasing the number of permanent staff, and cutting non-essential spending. In addition, the company is prioritizing Medicare Advantage and ACO Reach lines of business.
Notable Asset Sales
Essential to understanding Cano’s emergence from bankruptcy is the amount of divestment the company has undergone. At its peak, Cano operated in nine states and Puerto Rico either directly or through affiliates. To improve operations, the company terminated most of its affiliate partnerships and began to divest many of its operations. Following the reorganization process, the company only operates in Florida. Prior to bankruptcy, Cano had 143 locations in Florida, now reduced to 83 locations.
Cano’s largest asset sale was its centers in Texas and Nevada to CenterWell in a deal worth $66.7 million. At closing, the centers covered 14,450 members and 24 medical centers. These figures imply a multiple of $4,600 per member.
In December 2023, the company commenced a sale process for its ACO Reach line of business. The company has engaged with several bidders, but the transaction has not yet materialized. Cano’s ACO Reach business, which comprises 93,300 members, is projected to achieve $32 million in underwriting margin and $11 million in adjusted EBITDA from August to December 2024. The company also continues to explore sale opportunities related to its Medicaid line of business, which is expected to represent 36,200 members in 2024.
Go-Forward Expectations
Cano’s financial projections estimate $2.9 billion in revenue and 233,000 members during fiscal year (FY) 2025, growing to $3 billion and 239,000 members by FY 2028. During the same period, the company’s adjusted EBITDA is projected at $125 million, growing to $199 million.
Post-reorganization, the estimated value of Cano at the enterprise level was between $580 million and $720 million. The valuation reflects implied Year 1 (2025) multiples at the midpoint of 5.2x adjusted EBITDA and approximately $2,800 per member.
Conclusion
In June 2024, Cano successfully emerged from bankruptcy as a private company with an improved capital structure and more focused operations. The reduced debt burden, coupled with a $200 million injection of capital, has relieved some pressure on the company as it moves forward. Cano has already made significant progress towards its FY 2024 cost reduction goal, achieving $270 million in cost savings and productivity improvements through the first half of the year. Currently, Cano is focused on its Florida operations but has not ruled out a more prudent expansion in late 2025 or 2026 if it continues to meet its financial goals.
Sources
Cano Health, Inc. (n.d.). Press releases, public filings, and investor presentations. Retrieved from www.canohealth.com.
Cano Health. (2023, July 18). Cano Health announces successful emergence from Chapter 11. PR Newswire. https://www.prnewswire.com/news-releases/cano-health-announces-successful-emergence-from-chapter-11-302186063.html
Cano Health. (2023, June 7). Cano Health announces agreement with unsecured creditors committee and court approval of disclosure statement for its reorganization plan. PR Newswire. https://www.prnewswire.com/news-releases/cano-health-announces-agreement-with-unsecured-creditors-committee-and-court-approval-of-disclosure-statement-for-its-reorganization-plan-302152012.html
Cano Health. (2023, March 27). Cano Health enters restructuring support agreement with a significant majority of its lenders to strengthen financial position. PR Newswire. https://www.prnewswire.com/news-releases/cano-health-enters-restructuring-support-agreement-with-a-significant-majority-of-its-lenders-to-strengthen-financial-position-302052889.html
PR Newswire. (2023, March 28). NYSE suspends trading in Cano Health Inc. (CANO) and commences delisting proceedings. https://www.prnewswire.com/news-releases/nyse-suspends-trading-in-cano-health-inc-cano-and-commences-delisting-proceedings-302053778.html
Capital IQ. (n.d.). Investor presentations. Retrieved from Capital IQ website.
Public Information related to Cano Health’s Chapter 11 Plan for Reorganization (Case No. 24–10164). (n.d.). Veritaglobal. Retrieved July 26, 2024, from https://veritaglobal.net/CanoHealth
Klas, M. (2023, July 19). The new Chapter 11 plan for Cano Health aims to exit bankruptcy, cut debt. Miami Herald. https://www.miamiherald.com/news/health-care/article289663459.html
