I think that Practiceworks Preferred Series B are a steal at $1.75 which represents only 32 cents on the dollar of what I strongly believe to be a par claim. At this price level PRWRP offers a 35%+ yield to maturity.
Company Description: Practiceworks (PRW) provides practice management software to dentists, orthodontists, and oral surgeons. The software performs simple functions such as patient scheduling, billing, and reminders. PracticeWorks has installed base of approximately 35,000 providers, including approximately 27,000 dentists, 4,000 orthodontists and 4,000 oral surgeons. This represents a dominant share of each of these markets. This was a roll up that has ceased acquisitions and is now a turnaround candidate having suffered from difficulties intergrating various acquisitions and a product transition from a one time sale to a subscription based model.
Security Description: Practiceworks Convertible Redeemable Preferred Series B were issued to former Medical Dynamics shareholders (MEDY) as partial consideration for the merger of PRW and MEDY. They bear a preferred dividend of 6% which can be paid in kind (which I expect for the moment). Each share has a liquidation preferrence of $5.44. Each share is convertible into roughly .15 shares of PRW which now trade around $9.20. The company will redeem these shares in around 5 years.
- 35%+ yield to maturity
- Trades at 32 cents on the dollar
- Pays a 32 cent dividend (18.6% current yield)
- Convertible into $1.38 of PRW stock.
PRW Capital Structure: As of 9/30/01
Bank Debt - $24 million
Preferred (series A, B, C) - $33 million
Equity Mkt Cap - $86 million
Total Enterprise Value - $143 million
Note: By buying the preferred at 32% of par, you are buying in at a $35 million enterprise value.
The turnaround: The company ran into typical roll up problems on intergration, but appears to have turned the corner. The company is expected to end 2001 on a $4 million EBITDA run rate and is expected to to do about $15 million in EBITDA in 2002, with $10 million of FCF. This figure of $10 million of FCF was reaffirmed as recently as Friday when they announce a refinancing of their equity line of credit. These are management's projections for 2002. My opinion is that they have turned the corner and will show continuing operating inprovement each quarter in 2002 and if they don't get all the way to the $15 million in EBITDA, I think they will make it fairly close. There is certainly room for recovery their installed base of 35K systems and a 5-7 year replacement cycle implies that they should have replacement demand in the 5-7K units per year. Currently they are running at less than 2K annualized rate.
Capital Structure Issues: Before the company began to demonstrate a turnaround, the company was forces to accept "death spiral financing" in terms of their Series C Preferred and an Equity Line of Credit both from a company called Crescent. Friday, they announces a private placement of of around $6 million of equity with Cresent that allows they to have ample liquidity to cancel the Equity Line of Credit. They still have the Preferred C outstanding, but hope to refinance that issuance with an equity offering when they get their stock higher.
Conclusion: The beauty of this situation is that the valuation we are buying the preferred in doesn't require that huge of a turnaround. The equity market clearly believes in the turnaround and if one is skeptical about their ability to deliver on the turnaround (they have hit every number in the 6 months that I have been following them by the way, there are a number of interestion hedged or capital structure arbitrage trades that one could implement. As an example, if for every $1 you invested in the preferred, you shorted $1 of PRW, in a business failure scenario, you are break even. In a very bullish scenario, the stock can roughly triple before you lose money on the position (which given the stock trades at nearly 10x 2002 EBITDA already doesn't strike me as super likely). All the in between scenarios you do very well. To me however, my favorite way to play this opportunity is to simple be long the PRWRP
New Financing takes out one "death spiral" financing. 2002 Operating Performance can generate $10 million of FCF, demonstrating the sucess of the turnaround.