Description

RGX is a busted arb deal. The company develops and manages radiology centers, both free-standing and outsourced by hospitals. RGX operates 124 centers in 18 states. Saunders Karp & Megrue entered a definitive agreement to acquire the company for $7.25 in a leveraged recap/LBO announced August 23, 2000 with a financing condition. Trouble raising the money after the junk bond market’s implosion last year led to an extension of the “termination date” in the merger agreement from December 31, 2000 to June 30, 2001.

On April 26, 2001, with no prospects for selling the high yield debt in sight, the merger agreement was terminated. In announcing the termination, RGX reaffirmed it’s guidance for 2001. This 2001 guidance consists of:

- Same store growth between 8 and 12 percent
- Service fee revenue of $265 million to $275 million
- EBITDA of $67 million to $70 million
- Fully diluted earnings per share of $.70 to $.75
- Cash earnings per share of $.82 to $.87
- Days Sales Outstanding between 73 and 77 cents

At a price of $3.00, RGX is trading at the following multiples for 2001:
2001
Revenues: .93x
EBITDA: 3.7x
EBITDA less CapEx 5.5x
Earnings per Share 4.1x
Cash EPS 3.6x

These multiples are abysmally low, making this company a classic value play. It is largely ignored by the Street, both because of its small market capitalization ($59 million) and because anyone who did cover it dropped coverage because of the buyout. Additionally, the shareholder based changed to arbs and speculators during the pendancy of the deal. Now that the deal is off, the shareholder base should shift away from arbs to value/fundamental investors.

In the month prior to the deal being announced, RGX traded at an average price of $4.02. On April 26, 2001, the day the termination of the merger agreement was announced, RGX is trading at $3.00. In the time since the deal was announced to its termination, the Morgan Stanley Health Care Provider Index (“RXH”), was up 50.2%.

RGX operates radiology centers that provide diagnostic imaging services utilizing technology such as x-ray, MRI, computed tomography, ultrasound, nuclear medicine and positron emission tomography, as well as general radiology and flouroscopy.

RGX amended its credit agreement on March 30, 2001 to extend maturities and reduce principal repayments. Scheduled principal installments for 2001 have been reduced from $47,100,000 under the prior amended agreement to $12,000,000 under the new amendment. RGX had $157 million outstanding under the credit facilities as of December 31, 2000. Th The credit agreements expire in november 2003.

Additionally, RGX has $20 million of 8% convertible junior subordinated notes due 2009 outstanding with a converison price of $8.65. Finally, there are approximately $17 million of capital leases, which along with the rest of the debt, brings total debt to $195.8 million, which is 2.96x 2000 EBITDA of $66.2 million and 2.86x 2001 midpoint expected EBITDA of $68.5 million. In 2000, EBITDA to Interest coverage was 3.7x. RGX is rated B3 by Moodys and B+ by S&P.

2000 results were affected by a $18.8 million one-time charge in the fourth quarter. All references to 2000 results above are before this one-time charge. $13.3 million of the charge was to increase the provision for uncollectible accounts receivable. Following the charge, Radiologix’s days sales outstanding (DSOs) was 76 days. In addition, the Company recorded a $3.7 million pre-tax charge for the write-off of a note receivable and expensed approximately $1.8 million of merger transactions related costs incurred during 2000.

With the above credit information, it is easy to see how RGX should have ample liquidity to carry on its business in the near future. With $68.5 million of EBITDA expected in 2001, RGX has plenty of free cash flow after CapEx (2000’s capex included $14 million of maintenance CapEx and $10 million of acquisitions) and interest expense to pay down debt and reinvest in the business.

Catalyst

This company was attractive enough to lure an LBO firm with a $7.25 price back in mid 2000 when it had trailing EBITDA of $63 million. The prospects going forward are even better. With a resurgence in the high yield market, the possibility of a buyout of RGX increases. Without a viable high yield market, you own a company that has growing Revenue, EBITDA and earnings that is trading at just 3.7x EBITDA and 4.1x earnings. Not a bad stock to hold while waiting for something good to happen to the financing markets.