MedQuest likely to hold off on significant divestitures post-merger with Novant18 August 2007

MedQuest Associates will likely hold off from making significant divestitures after it closes its merger with Novant Health, said a buysider and a sellsider. The company’s shareholders, including management and previous sponsor JPMorgan Partners, stand to receive another USD 35m in cash consideration from Novant if the company can hit its USD 53m FY08 consolidated EBITDA target. MedQuest officials confirmed on today’s conference call that it had no definitive plans concerning divestitures. The company will likely need the EBITDA contribution of all of its stores in order to hit the USD 53m FY08 EBITDA target, said the sellsider. If the company’s performance enables it to make the USD 35m of additional cash consideration, the first USD 10m will go to the preferred stock-holders, JPMorgan Partners, while the remaining amount up to USD 25m will go to its Class A stock holders, MedQuest’s management, said the sellsider. JPMorgan Partners will also receive the initial USD 45m of cash proceeds from the sale. Management can receive some of the contingent fee even if it falls short of the USD 53m EBITDA mark, according to the merger agreement filed on Tuesday. At its present EBITDA run-rate of USD 46.7m, the additional cash premium is set at USD 9m, which would all go to JPMorgan Partners. However, if the company marginally improves EBITDA performance from the current run rate, management will begin to share in the additional cash consideration, according to the deal’s documentation released on Wednesday. With two quarters of pre-reimbursement cut earnings mandated by the Deficit Reduction Act (DRA), improving EBITDA in 2008 could prove difficult, said the analyst. For Medquest bondholders, the USD 403m merger agreement triggers the 101% change-of-control premium, the company said on Monday. The USD 177m 11.875% operating company sub-notes will be taken out at 101, while the USD 117m 12.25% senior discount holding company notes due 2012 will be taken out at the accreted 101% value at 90, as previously reported by Debtwire. Novant Health is a non-profit community healthcare system with operations based in the Carolinas and Georgia. MedQuest’s core markets are in the same states, though it has non-core diagnostic imaging facilities in Arizona, Texas and New Mexico, said the analyst. Over the long term, Novant may not want to retain those facilities as they do not coincide with its geographic footprint, said the analyst. However, management might be dissuaded from selling them off in the near term as it could hurt their ability to reach the earn-out. The Georgia-based medical imaging provider’s sub notes vaulted to par from 75 on Monday after the company announced that Novant would acquire MedQuest for USD 45m in cash and USD 358m in assumed debt. The company’s discount notes have fallen to 84 from 88 on 14 August, but are still up significantly from their pre-acquisition announcement level at 22, according to MarketAxess.

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