APP joins upper echelon of imaging center operators

Questar acquisition will build APP’s stable to 134 centers

The imaging center industry has a new powerhouse. Radiology services firm American Physician Partners has announced an agreement to acquire imaging center operator Questar Imaging. When completed, the $44.6 million deal would add 44 centers to APP’s existing portfolio of 90 radiology centers, most of which are freestanding imaging centers.

Subject to APP shareholder approval, the deal would make the Dallas-based firm one of the largest operators of radiology centers in the U.S., with operations in 30 states and the District of Columbia. APP currently maintains facilities in 18 states. Questar has operations in 12 additional states, as well as in three states—California, Florida, and Kansas—where APP also operates centers. Of the 44 Questar centers, 27 are fully operational, while another 17 are currently being built.

“Our strategy is to concentrate in particular marketplaces and have multiple imaging facilities,” said Mark L. Wagar, APP chairman, president, and CEO. “The Questar philosophy is very similar to ours in that they enter markets where they believe they can gain geographic significance in a relatively short period of time.”

APP already has experience with Questar imaging centers, having purchased two California sites from the Tampa, FL-based firm in 1998. Questar’s operating team will remain with APP to help with the integration.

The acquisition will impose a heavy debt on APP, however. If completed, the Questar deal would total $25.9 million dollars in cash and $18.7 million in capital lease assumption. This outlay would increase APP’s debt to between $160 million and $180 million, according to Wagar. With a market cap of between $125 million and $130 million, the company would seem to have a negative value. This conclusion could be misleading, he said.

“We actually have a positive equity value,” he said. “When the company was formed, seven radiology groups pooled their imaging center and radiology center assets into one company and the FTC required a particular accounting approach such that we started with negative equity. So, if that combination of radiology centers had been accounted for as a purchase, we’d have book equity of about $200 million.”

Wagar and his colleagues have been able to convince investors that APP is a good risk. Along with the acquisition of Questar, APP unveiled a $20-million investment from DB Capital Partners, a private equity arm and affiliate of Deutsche Bank, which in return received 10-year convertible junior subordinated notes bearing 8%. The notes are convertible into APP common stock at a conversion price of $8.625.

With the stock price currently hovering around $7 per share, APP’s investment partners need faith that the company’s fortunes will grow. That faith comes in part from expectations that the addition of Questar imaging centers will markedly boost APP’s revenues. The investment by DB Capital, in turn, has helped make the Questar acquisition possible by funding the cash portion of the transaction, according to Wagar.

Independent freestanding facilities make up much of the APP network. Other members include joint ventures with hospitals and hospital-based operations where installed equipment is owned and operated by APP.

In addition to its role as an imaging center operator, APP also participates in radiology practice management. The firm works with a number of radiologists and professional services, which, among them, have contracts with 58 hospitals, Wagar said. Recognizing that its name—American Physician Partners—does not reflect the company’s increasing focus on imaging centers, company executives are considering a new name and stock ticker symbol (currently APPM). No change is expected, however, before the end of the year.

The Questar deal will also adjust the mix of services provided by APP centers. The purchase substantially increases the firm’s base of MRI services, Wagar said. Each of the Questar centers offers MRI, while not all of the current APP sites do. About 90% of the APP MRI facilities are open systems. Most have Hitachi scanners, although a few scanners from other vendors are also in place, according to Dr. Charles Fiske, a radiologist for Pacific Imaging of Walnut Creek, CA, and chairman of the physician advisory board for APP.

Questar’s equipment is also relatively new, reducing the need for widespread purchasing of new scanners. Most of the Questar centers are less than two years old and none is more than five, Fiske said. Some centers in the network will require capital investment, however. The company expects to spend between $25 million and $30 million on local investments, including marketing support, as well as equipment upgrades and replacements.