November 01, 2010 - 10:17pm EST by
2010 2011
Price: 8.46 EPS $0.00 --
Shares Out. (in M): 38 P/E -- --
Market Cap (in $M): 317 P/FCF -- --
Net Debt (in $M): 285 EBIT 0 0
TEV ($): 602 TEV/EBIT -- --

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Note: Disregard the financial data above because I am not using MEDQ numbers but CBAY LN numbers.  Also, sorry for the crappy formatting.  

This is a two-fold idea.  


1)  Short CBAY LN/ buy MEDQ at a ratio of 4.24:1.  The short will net proceeds of $10.65.  On today's closing MEDQ price of $8.46, total return by the end of

January, 2011, will be 26% (on long dollars invested).  


2)  Go long MEDQ without the corresponding CBAY LN short


As an individual investor, I can't buy CBAY LN on interactive brokers let alone short it so I'm not sure what the borrow is like for institutions. 

Regardless, I think going long MEDQ naked represents a compelling opportunity.


NOTE:  Please read the excellent MEDQ writeup from mitc567 that explains the entire Medquest story.  This will only be an update given the extreme changes

that were recently announced which were:


1)  MEDQ borrowed $310 Million on October 1st to pay a one time dividend of $4.70.  That has been paid.  Most of this money went to CBAY LN, who

owns 69.5% of MEDQ.  

2)  At the same time, CBAY announced the had come to an agreement to purchase 13% of MEDQ that they don't own for 4.24 shares of CBAY LN,

subject to CBAY LN listing on NASDAQ and delisting in the UK by Jan 30.  This agreement is with a consortium of institutional investors and will take

CBAY's MEDQ ownership to 82.5%.  

3)  CBAY filed an S-1 announcing their intention to raise up to $115 Million in an IPO and delist in the UK.  

4)  CBAY announced they will offer the same 4.24 exchange ratio for all holders of MEDQ common stock, not only the 13% they signed the agreement

with.  From Press Release:


"In addition, the Company announces that, further to the announcement released on October 1, 2010, CBay has filed a Registration Statement on

Form S-4 with the SEC relating to a proposed exchange offer ("Exchange Offer") pursuant to which CBay expects to offer to exchange shares of CBay

common stock ("CBay Shares") for outstanding shares of common stock of CBay's 69.5% subsidiary, MedQuist Inc. ("MedQuist") ("MedQuist Shares"). 

CBay has previously entered into a definitive agreement ("MedQuist Exchange Agreement") with holders of approximately 13.0% of MedQuist's outstanding

common stock, pursuant to which those MedQuist stockholders will receive 4.2459 CBay Shares for each MedQuist Share, subject to certain adjustments,

including adjustments relating to the amount of MedQuist's net debt at closing and to any reverse share split or other similar conversion CBay may

effect in respect of its common stock. 


The closing under the MedQuist Exchange Agreement is subject to various conditions, including completion of the Offering, the listing of CBay Shares on

NASDAQ and the reincorporation of the Company in Delaware, and would increase CBay's ownership in MedQuist from 69.5% to 82.5%.  While the

exchange ratio for the Exchange Offer has not been fixed, CBay currently expects that it will be approximately the same as the exchange ratio applicable

under the MedQuist Exchange Agreement.  No assurance can be given regarding whether the Exchange Offer will be made or regarding the applicable

exchange ratio or other terms of the Exchange Offer.  The completion of the Exchange Offer, if made, will be subject to certain conditions to be described

in the related preliminary prospectus, including the effectiveness of the registration statement on Form S-4 relating to the Exchange Offer."


So what does that get us?  The new CBAY will look something like this:


$275 million net debt

211 Million shares outstanding @ 1.57 pounds = $530 Million US market cap.  


EV = $805 million.


Note:  We are NOT paying 1.57 pounds for CBAY today, but a discount of approximately 20%.  Based on MEDQ closing price of $8.46, we are paying

$1.25/share and the current market cap of CBAY = $422 Million and the current EV = $700 Million.  


Also note, this is BEFORE they sell up to $115 Million of new stock at an undisclosed range.  Should be obviously neutral to EV assuming its done around

current market prices but there is reason to believe after a roadshow they will get a premium to market prices given how illiquid CBAY/MEDQ are currently.  


Pro Forma for all of MEDQ, CBAY did $40 Million of EBITDA in 1H 2010 and $90 Million in 2009.  


They note:


The pro forma combined statements of operations and other operating data for the year ended December 31, 2009 and the six months ended

June 30, 2010 do not give effect to the following:


- the impact on net revenues from volume declines resulting from Spheris’ customer terminations prior to the Spheris Acquisition. The pro forma net revenues

for the year ended December 31, 2009 and for the six months ended June 30, 2010 include $24.6 million and $2.3 million, respectively, of net revenues associated

with such terminations; and


- the full impact on Adjusted EBITDA of cost savings and synergies resulting from the Spheris Acquisition, which we have implemented since
the Spheris Acquisition and expect to yield $7.0 million of cost savings in the fourth quarter of 2010, representing an annualized benefit of
$28.0 million. Our results for the six months ended June 30, 2010 reflect $0.9 million of such cost savings.



For potential on what MEDQ was thought to be able to do standalone, please see mitc567's writeup.  Without any of CBAY's operations, he

projected over $100 Million in MEDQ EBITDA alone in 2011.  Note, there is no sell side coverage of MEDQ and I am not a healthcare analyst

so this idea is light on fundamental details.  I was attracted to this idea due to the nature of it being a special situation.  In the spirit of this

being a community, I would greatly appreciate input from people with healthcare expertise.  


I believe that 2011 numbers for CBAY given cost cutting/synergies at Spheris and synergies from consolidating MEDQ and CBAY could be substantially higher

than $100 Million in EBITDA.  Even without any growth and just accounting for the $28 Million in annual synergies at Spheris, they will do $108

Million of EBITDA.   Assuming modest synergies EBITDA could be in the $125-$130 range.  Taxes appear to be low as is capex

(per Mitch's writeup) so free cash flow at CBAY should be high - estimated at $70-$80 Million (Sanity check, Mitch estimated $90 Million in 2011 FCF at

MEDQ alone, without CBAY).  Assuming 211 Million shares, FCF per share could be north of 35 cents on a $2 share price ($1.25 X 1.6 exchange rate),

or 6x free cash flow and 5.6X EV/EBITDA.  I think the $125 EBITDA number is conservative and I'm basing it on my best guess - CBAY is in an IPO quiet period.  

Also note, the bankers are planning on raising up to $115 Million in a primary offering.  Given CBAY's current market cap of $422 Million

(based on buying MEDQ at today's price), they would be raising 25% of the market cap.  I believe this is pretty aggressive and they are planning on

IPO'ing at a price substantially higher than todays implied price (also a sanity check on my numbers, albeit a little flimsy).  

RISKS:  CBAY IPO is cancelled; they do not offer 4.24 shares per MEDQ share; synergies don't materialize  





IPO of CBAY LN in Jan, 2011
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