Is Well Health (TSX:WELL) a Buy After Announcing Plans to Acquire CRH Medical (TSX:CRH)?

Shares of CRH Medical (TSX:CRH) soared on Monday on news that Well Health (TSX:WELL) would be acquiring its business for US$292.7 million. The deal is still subject to shareholder approval, but it is expected to close in the second quarter of this year.

The move is just the latest effort by Well Health to penetrate the U.S. market. In November 2020, it announced that it had completed its purchase of a majority (58%) stake in Circle Medical Technologies. But at a price tag of US$14.3 million, it was a much smaller deal than the acquisition of CRH. And at a run rate of just US$5.7 million in revenue, Circle Medical’s top line is just a fraction of the US$100 million that CRH has generated over the past four quarters. In the nine-month period ending Sept. 30, 2020, Well Health itself only reported $33.1 million in sales.

To help fund the transaction, the company is also issuing shares to raise $295.5 million.

Why Well Health is excited about this deal

Well Health’s acquisition of Circle Medical was underwhelming, to put it lightly. With modest revenue and big-name companies like Teladoc and Amwell to compete with in telehealth, the acquisition wasn’t likely going to make Well Health very competitive in the U.S. market. CRH isn’t going to make Well Health an industry leader by any stretch, but it definitely gives it a more formidable presence south of the border that it can build on.

CEO Hamed Shahbazi stated that “This will be a monumental acquisition for WELL as it will significantly boost our revenue and EBITDA profile, dramatically enhance our U.S. operations, and provide us with additional inorganic and organic growth opportunities.”

The acquisition not only gives the company a strong presence in the U.S., but it extends its capabilities and competencies. CRH focuses on anesthesia services and its O’Regan System helps treat people with hemorrhoids.

Does this make Well Health stock a buy?

The acquisition is an exciting move for Well Health to gain more traction in the U.S. market. However, this isn’t a risk-free stock by any means. In just the fourth quarter, Well Health said it closed seven transactions. And this latest purchase is only going to add more cost and complexity to its business. It’s going to take time for Well Health to remove redundancies due to all these acquisitions, and in the meantime, its bottom line could suffer.

CRH’s business is also not ideal. While it’ll generate revenue growth for Well Health, its margins are brutal. Over the past three quarters, CRH generated US$69.4 million in sales, but its anesthesia service expenses of US$70.6 million wiped that out entirely. That doesn’t even factor in other expenses yet. With some awful margins, I’m not convinced this is going to pay off for Well Health over the long haul. It’ll increase sales, but the bottom line doesn’t look great at all, and the business is not worth paying a premium for.

Well Health has been a hot buy over the past year, soaring 375%. But with a price-to-sales ratio of more than 25, investors are paying a steep price for the stock right now and are better off looking at more value-oriented investments instead.