Dive Brief:

• Health IT vendor Allscripts is selling its hospitals and large physician practices business segment to Canada-based Harris Computer Corporation, a subsidiary of holding company Constellation Software, for up to $700 million in cash, the companies announced Wednesday.
• The segment includes much of Allscripts' legacy EHR business, and assets that make up roughly three-fifths of the Chicago-based company's total revenue. Allscripts is selling Sunrise, Paragon, Touchworks, Opal, Star, HealthQuart and Db Motion. All together, those businesses accounted for $928 million in 2021.
• The sale, which leaves Allscripts with its Practice Fusion, Professional and Veradigm segments, is meant to focus the company's offerings, CEO Paul Black said. It's expected to close in the second quarter of this year.

Dive Insight:

Harris, which already has more than 20 healthcare software companies in its holdings, is looking to round out its digital health portfolio by snapping up some of Allscripts' medical records software, which includes software for records, regulatory compliance, billing and workflow improvement.

Constellation Software, a holding behemoth with a roughly $37 billion market cap that purchases and operates vertical market software businesses, is "excited to welcome the staff and customers that helped make Allscripts a success in the hospitals and large physician practices segment," Jerry Canada, Harris Group President for Healthcare, said in a statement on the deal.

Constellation, which generally keeps the brands and leadership of its acquisitions intact, has agreed to pay Allscripts a fixed price of $670 million at closing, plus up to $30 million based on the segments' performance in the two years after the transaction closes.

It's a below-market rate for the acquisition, at 0.8 times annual sales, or about 4.8 times its expected earnings before interest, taxes, depreciation or amortization this year. That's a somewhat low valuation, especially versus Allscripts' EHR peers — the EHR average is about 10.6 times forward-looking earnings, according to SVB Leerink analyst Stephanie Davis.

"The discount isn't unwarranted — the business has consistently seen low single digit revenue declines," and has been shedding clients, Davis said in a note on the deal. But "while bears will argue that the valuation is cheap ... we would argue that ultimately, the purchase price doesn't matter," Davis said.

Selling the EHR business nixes investor concerns about continued client attrition and, in its stead, leaves a standalone asset with faster growth, better margins and the tailwinds and exit opportunities of a health tech data analytics asset, according to the analyst.

Allscripts has been focusing on cleaning up its portfolio for a few years now, following a wide net loss in 2019 due in part to client attrition from acute care services.

As part of this refresh, the vendor has been strategically investing in EHR-agnostic platforms, including in the areas of payment, data analytics, life sciences and research marketplaces. That's benefited its health IT and data analytics segment Veradigm, which once the deal is completed will stand at the core of Allscripts' operations.

In the fourth quarter, Allscripts' hospitals and large physician practice segment was down 2% year over year, while Veradigm grew by 9%.

"Revenue results continue to be a tale of two different stories," CFO Rick Poulton told investors on a late February earnings call.

Veradigm, which relies on data from Allscripts' clients, won't be disrupted by the divestiture. While the platform is primarily built on Allscripts' EHR data, the deal won't affect that data flow, Davis said.

Additionally, Veradigm is linked more strongly to Allscripts' small- to mid-size ambulatory EHR, PracticeFusion — which Allscripts is retaining — versus its larger practice and inpatient software. Allscripts also pulls data for Veradigm from its financial, value-based and telehealth solutions.

"Whatever trend lines are happening in hospital business doesn't really have a bearing on what we're doing in Veradigm," Poulton said.