TME hopes to intensify industry consolidation

August 26, 1992

TME's drive to acquire or develop 15 new imaging centers is proceedingmore slowly than the company had expected. Center prices appearto be on the way down, however, which should stimulate more acquisitionsover the next several months, according to

TME's drive to acquire or develop 15 new imaging centers is proceedingmore slowly than the company had expected. Center prices appearto be on the way down, however, which should stimulate more acquisitionsover the next several months, according to president CherrillFarnsworth.

While the Houston imaging center firm remains on the lookoutfor suitable independent centers, it is seriously consideringmerger propositions. Hitching up with another center chain wouldcombine resources and build a larger center network with strongermarket presence.

"I'd like to be the person who gets the consolidationstarted," Farnsworth told SCAN. "It's like getting thefirst pickle out of the jar--the first merger is hard, but oncethat pickle is out you'll see it all loosen up."

TME raised $22.5 million in partnership funds last year toback an expansion drive (SCAN 10/23/91). About $12.5 million ofthose funds remains. Combined with debt financing, the firm hasan investment pool of $25 million. With these funds, TME can affordto be choosy about a merger partner, Farnsworth said.

"We're looking for (a center firm) with good earningsand public stock, because that will get us where we're going,"she said.

Fifty centers is the minimum to reach critical mass, Farnsworthsaid. Ideally, a powerhouse imaging services firm would have 75to 100 facilities. TME currently has 21.

TME has built five centers with the funds raised last year.These include two in California and one each in Florida, Arizonaand Utah. The firm plans to add four more before the end of theyear, including two large university projects, which are pending.

One of the university projects is located at Houston MedicalCenter, where TME has agreed to build an international imagingsciences institute that will incorporate MRI, PET, SPECT and theElecta Gamma Knife radiosurgery system. The equipment will beused for teaching, research and clinical purposes, she said.

The price of existing independent imaging centers appears tobe dropping under the threat of stronger federal and state legislationrestricting referring-physician ownership of medical centers,Farnsworth said.

The federal safe harbor regulations were first thought to bea boon for image center management firms looking to expand throughacquisitions. But the expected flow of center sales never materializedas many physician partnerships waited to see what would transpirenext.

With stiff legislation that would restrict referring-physicianownership pending in many state legislatures and the House ofRepresentatives, physician investors are beginning to realizethat buyouts are inevitable, Farnsworth said.

"I think that transactions are going to increase significantlyover the next few weeks and months," she said. Further consolidationin the imaging center management industry will result, she added.

"There are a lot of small public companies, and a lotof the privates want to be public so they can participate in theacquisitions," she said. "I think somebody will emergeas the powerhouse and begin to buy up the doctor partnerships."

The growing influence of managed care and hospital group purchasingof imaging services has created a strong incentive for imagingfirms to expand, Farnsworth said.

"With 75 to 100 centers, you can get an insurance companyhighly interested in entering a nationwide contract, or at leasta regional contract, if you have a dense concentration,"she said.

In addition, physician partnerships will find it easier tosell to a known entity, Farnsworth said.

TME's strong financial position will allow it to move quicklyon acquisition opportunities when they arise. The firm will alsoproceed with its new project development, Farnsworth said.

"That way we can easily see what it's costing us to buyan existing business versus building one down the street,"she said.