Healthcare information software solutions provider, Merge Healthcare (MRGE) recently announced a private offering of $52 million of 11.75% senior secured notes. The issue price is 103% of the principal amount of the notes, which will mature in 2015. The offer closes on June 14, 2011.
Merge offered the notes in two forms. First, as additional debt securities under an indenture pursuant to which Merge earlier issued $200 million of Senior Secured Notes (due in 2015). Second, as supplemented by a supplemental indenture signed on June 14, 2011 related to the company’s previously announced consent solicitation. Merge expects these notes to be guaranteed on a senior basis by all of the company’s domestic restricted subsidiaries.
Merge 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 the fourth quarter 2010.
Recently, in June 2011, Merge entered into an agreement to acquire Ophthalmic Imaging Systems for approximately $30.3 million. As 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 in 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, bottom line continues to remain under pressure.
Furthermore, the company is investing heavily to reinvigorate its sales team, thereby raising expenses further. During the quarter, the company increased its sales and marketing expenses by 208.4% to $8.6 million. Further, the company’s, 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 ageing population. However, Merge’s growth prospect is highly dependent on capital investments by hospitals for advanced imaging solutions, which are in turn tied to 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 also corresponds to a Zacks # 5 Rank (Strong Sell).
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