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ETFs Set to Surge on Virtual Healthcare Deal

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Virtual healthcare has been on a spike lately due to the coronavirus pandemic, which has kept patients from visiting their doctors. The latest study shows that about 46% of Americans now use telehealth to replace canceled visits, up from just 11% in 2019. The solid trend will likely continue as Trump's order will reinforce its use in under-served rural areas and elsewhere in the months to come.

The ongoing boom in online care and consultations has led to merger & acquisition activity in the telehealth services space. This is especially true as the largest U.S. telemedicine provider Teladoc Health Inc. (TDOC - Free Report) has agreed to buy chronic care provider Livongo Health Inc for $18.5 billion in stock and cash. The transaction will create a company that can serve a spectrum of health needs, using virtual care.

Inside the Deal

Under the terms of the deal, Teladoc Health will pay 0.5920 share plus $11.33 in cash for each Livongo share. The total deal price of $158.99 per share represents a 10% premium over Livongo stock's record closing price of $144.53 as of Aug 5. Upon completion of the merger, Teladoc shareholders will own approximately 58% and Livongo shareholders will own the remaining 42% of the combined company.

Teladoc focuses on providing virtual visits to patients in a variety of specialties and modes. Meanwhile, Livongo, which got its start in diabetes care, has created health management programs for individuals with chronic conditions. As a result, the merger of the two companies will create the global leader in consumer-centered virtual care industry. It will put Teladoc Health at the forefront of the next-generation of healthcare where demand for virtual care is surging (read: ETFs to Play New Trends Triggered by COVID-19).

The combined company is expected to have pro forma revenues of approximately $1.3 billion for 2020, representing year-over-year pro forma growth of 85%. Pro forma adjusted EBITDA is expected to be more than $120 million for 2020.

The transaction will generate about $100 million in revenue synergies by the end of the second year after the deal closes and aims to achieve $500 million on a run rate basis by 2025. The deal is expected to close in the in the fourth quarter of 2020 and is subject to regulatory and Teladoc Health and Livongo shareholder approvals. The newly combined company will be called Teladoc Health and headquartered in Purchase, New York.

Market Impact

Following the news, shares of Livongo declined 11.4% to close the day and crushed its average volume as nearly 31.6 million shares moved hands compared with 4.4 million, on average. Meanwhile, shares of Teladoc were down 18.7%.

Investors should note that both Teladoc and Livongo have been flying higher this year reaching all-time highs on soaring demand for virtual healthcare. Livongo’s share price is nearly six times higher than it was at the start of 2020, and Teladoc has tripled in that period.

The news has put the spotlight on a number of ETFs that could be the best ways for investors to tap the opportunity arising from the TDOC-LVGO deal. These funds are expected to see smooth trading in the months to come:

Franklin Genomic Advancements ETF (HELX - Free Report)

This ETF provides access to companies benefiting from or facilitating the use of new research including DNA sequencing, gene editing and personalized medicine. It holds 56 stocks in its basket with Livongo and Teladoc making up for 5.7% and 3%, respectively. The fund is skewed toward life sciences tools & services at 40.9%, while biotechnology and health care technology round off the next two spots with double-digit exposure each. It has accumulated $3.5 million in its asset base since its launch in late February and charges investors 50 bps in annual fees.

Invesco DWA Healthcare Momentum ETF (PTH - Free Report)

This fund follows the DWA Healthcare Technical Leaders Index and holds a basket of 51 U.S. companies. Teladoc and Livongo makes up for around 5% of assets. The product has AUM of $571.8 million and has expense ratio of 0.60%. Biotechnology takes the largest share at 44.8%, while healthcare equipment and supplies, and healthcare providers and services round off the next two with double-digit share each. PTH has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: COVID-19 Vaccine Push Brings Hope: Stock & ETF Beneficiaries).

iShares U.S. Healthcare Providers ETF (IHF - Free Report)

This ETF follows the Dow Jones U.S. Select Healthcare Providers Index with exposure to companies that provide health insurance, diagnostics and specialized treatment. In total, the fund holds 48 securities in its basket. TDOC and LVGO accounts for 4.7% and 0.5% share, respectively. The fund has amassed $989 million in AUM. It charges 42 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.

AI Powered Equity ETF (AIEQ - Free Report)

Having AUM of $94.8 million, this is the first and only actively managed ETF to fully utilize artificial intelligence as a method for stock selection. The ETF applies proprietary analytical algorithms to AI technology, which can process over one million pieces of information per day, to build predictive financial models on approximately 6,000 U.S. companies. It holds a basket of 152 securities with Teladoc and Livongo making up for nearly 2% share each. The fund charges 77 bps in annual fees.

Franklin Disruptive Commerce ETF (BUYZ - Free Report)

This fund debuted in the space in late February and seeks capital appreciation by investing in innovative companies benefiting from transformation in the e-commerce space. It provides access to companies that are related to new online markets, streamlined procurement systems, and game-changing ways to deliver goods and services. The ETF has attracted $16.6 million in its asset base and charges 50 bps in annual fees. It has 60 stocks in its basket with Teladoc and Livongo making up for nearly 2% share each (read: Top Sector of 1H & Its Top ETFs).

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