High center price tags hold buyers at bay

January 29, 1992

Raytel's purchase last month of a Merrill Lynch partnership supporting11 imaging centers (SCAN 12/25/91) reflects an isolated burstof activity in an unexpectedly slow post-safe-harbor market forcenter acquisitions. Asking prices for independent centers

Raytel's purchase last month of a Merrill Lynch partnership supporting11 imaging centers (SCAN 12/25/91) reflects an isolated burstof activity in an unexpectedly slow post-safe-harbor market forcenter acquisitions.

Asking prices for independent centers dipped following theJuly publication of Department of Health and Human Services regulationsrestricting referring-physician investment in medical centers.Prices rose again quickly, however, as physician owners discountedthe risk of prosecution and conviction of fraud, according toRichard F. Bader, Raytel chairman and CEO.

"There are not a lot of centers being sold right now.The reason is that they (physician owners) have become comfortablewith safe harbors. Most of these people are prepared to fightit out rather than sell," Bader told SCAN.

Merrill Lynch's sale of its center partnership originated wellbefore the safe-harbor rules were issued and was spurred by thegiant financial firm's strategic decision to divest itself ofthe business. Individual Merrill Lynch centers, although theyinvolve physician partners, are not in violation of safe harborsand will not have to be restructured, Bader said.

Raytel had considered purchasing independent centers immediatelyfollowing the issuance of safe harbors, despite its strategy ofacquiring center chains. Unlike many imaging services firms, theSanta Clara, CA, company is cash rich and underleveraged, notedBader.

"We felt there was an opportunity. Most people in ourboat are looking for cash. We are not. We tried to buy (an imagingcenter) right after safe harbors came out, as an experiment. Itwas a good center, but they were in violation of safe harbors.At first they panicked and fixed a price that was reasonable,"he said.

The physician-owners subsequently increased the asking pricebeyond what Raytel considered acceptable, he said.

Center owners cannot ignore the generally required rate ofreturn for acquisitions, Bader said. Depending on the industry,prices for businesses vary roughly from two to four times cashflow. In the case of highly leveraged imaging centers, cash flowis usually calculated as earnings before taxes, depreciation andamortization. Interest payments are also deducted in industriesthat rely less on debt.

"You can't look at these centers in a vacuum. You haveto view a center the same as you view any company," he said.

Most people looking at imaging centers now find that the goodones are overpriced and the bad ones, once acquired, are rarelyturned around, he said.