Healthcare information software solutions provider, Merge Healthcare (MRGE) recently completed private offering of $52 million of 11.75% senior secured notes.
The company offered the notes as additional debt securities under an indenture in connection to which the company earlier issued $200 million of Senior Secured Notes (due in 2015), supplemented by a supplemental indenture signed on June 14, 2011 related to its previously announced consent solicitation.
Merge expects these notes to be guaranteed on a senior basis by all of its domestic restricted subsidiaries.The company plans to utilize the net proceeds of the offering to redeem and retire all of the company’s outstanding Series A Preferred Stock and to pay off all related expenses.
Earlier, Merge issued $200 million of 11.75% senior secured notes (due 2015) in April 2010 to finance the acquisition of AMICAS (which was exchanged in November 2010), which resulted in a higher interest expense in later period. During the first quarter of 2011, the company incurred net interest expense of $6.5 million compared with net interest income of $0.01 million in the year-ago period, though consistent with fourth- quarter 2010.
Recently, Merge entered into an agreement to acquire Ophthalmic Imaging Systems for approximately $30.3 million. Per the agreement, for each share of Ophthalmic Imaging, shareholders will receive 0.1693 share of Merge. Around 72% of Ophthalmic Imaging shareholders have agreed to the deal. Merge expects to close the acquisition in the third quarter of 2011.
Merge is already witnessing pressure on its bottom line owing to higher interest expense due to the debt incurred on AMICAS acquisition. Moreover, issuance of shares to fund the deal with Ophthalmic Imaging will lead to dilution of shareholder value. As a result, the company’s bottom line continues to remain under pressure.
Furthermore, the company is investing heavily to reinvigorate its sales team, thereby further raising expenses. During first-quarter 2011, the company’s sales and marketing expenses shot up more than three-fold year over year to $8.6 million. Moreover, its research and development as well as general and administrative expenses soared 107.8% and 71.1%, respectively.
There is immense potential in the diagnostic imaging market, especially with the government’s emphasis on HIT and an aging population. However, Merge’s growth prospect is highly dependent on capital investments by hospitals for advanced imaging solutions, which are in turn dependent on general economic conditions. The presence of many big players like General Electric (GE) and McKesson (MCK) has made the diagnostic imaging market highly competitive.
We currently have an Underperform rating on Merge, which corresponds to a Zacks # 5 Rank (“Strong Sell”).
GENL ELECTRIC (GE): Free Stock Analysis Report
MCKESSON CORP (MCK): Free Stock Analysis Report
MERGE HEALTHCAR (MRGE): Free Stock Analysis Report
Zacks Investment Research
