Closing the Books: InSight Joins Others in Going Private
By RAJIV VYAS
The promise of a big cash infusion and the creation of a currency for expansion and acquisitions are the siren songs of going public.
But for some companies, the case for going private can prove just as compelling.
Newport Beach-based InSight Health Services Corp. recently went private in a move company officials said was aimed at bolstering shareholder value and offer investors a chance to cash out.
InSight joins a group of Orange County companies that have traded Wall Street for private ownership, including Irvine-based St. John Knits Inc., Aliso Viejo-based buy.com Inc. and Costa Mesa-based White Cap Industries Inc.
In October, InSight was bought out by private equity firms J.W. Childs Associates LP of Boston and Washington D.C.-based The Halifax Group LLC. The buyers paid $18 a share for the medical imaging company, a 7% premium above InSight’s share price when the deal was unveiled in July and nearly double from January when the company said it was exploring options.
“The main story here is the value we have created for our shareholders,” said Steven Plochocki, InSight’s chief executive.
The buyout had the backing of InSight’s two big investors, The Carlyle Group and General Electric Co. Together, the two owned about 67% of InSight.
Carlyle, a Washington, D.C.-based private equity firm, invested $25 million in InSight in 1997 and got nearly $60 million in the buyout. GE had been a longtime InSight investor and received $65 million in the deal.
InSight officials opted for a buyout as the best option for the company and its majority owners. InSight, which offers computed tomography and magnetic resonance imaging services to hospitals and other healthcare providers, has plans to more than double its roughly $210 million in annual sales in the next few years.
“To maintain our growth rate of between 15% and 20%, we would continue to make additional capital investments of more than $30 million in 2002 and a similar amount in 2003,” said Thomas Croal, InSight’s chief financial officer.
InSight said it plans to open up to 10 new diagnostic imaging centers and mobile units in 2002 and also make three to four acquisitions requiring $30 million to $40 million.
But Carlyle and GE weren’t interested in providing more funding for InSight’s expansion. They wanted returns on their investments and had been looking for a way out for past year or so. A straight stock sale by the two big investors would have hammered InSight’s lightly traded stock.
InSight’s new owners have brought in $100 million in capital and also helped the company secure financing for the next few years. Since going private, InSight has raised more than $225 million through a debt offering and has secured a $150 million bank loan. The company has another $75 million line of credit for acquisitions and $50 million in working capital.
Still, going private could be a temporary move for InSight. Chief Executive Plochocki said that if the stock market improves, the company could go public again in couple of years. One of InSight’s rivals, Anaheim-based Alliance Imaging Inc., has gone public three times and has been taken private twice.
With a lackluster stock market, going private could become an option for more companies, said Char-les Ruck, head of the mergers and acquisitions group and a partner at the Costa Mesa office of Los Angeles-based law firm Latham & Watkins.
“This is the time when you have LBO firms that come in and swallow up public companies,” he said. “Often times, the company’s stock has been beaten down, they are a micro cap company and they can’t escape from the clutches of their past.”
Going private isn’t always dictated by a downturn on Wall Street. During the bull market of the late 1990s, several non-technology companies in OC and elsewhere opted to go private because they felt they were undervalued vs. the tech darlings of the day.
Among those locally that gave up public life during tech’s heyday: The Irvine Company’s Irvine Apartment Communities Inc., tool supplier White Cap Industries and San Clemente-based Sunstone Hotel Investors Inc.
The question about whether a company should be private or public has been debated ever since the first stock exchange opened in Amsterdam in 1602.
Luxury apparel maker St. John Knits decided that being privately held made more sense. The company, which is closely tied to Chief Executive Robert Gray and his family, went public in 1993.
But in 1999, St. John went private again in a $532 million management-led buyout backed by Vestar Capital Partners, a New York-based investment firm. Wall Street’s focus on quarterly sales growth conflicted with the company’s attention to quality, Gray said at the time.
Also in 1999, Irvine Co. Chairman Donald Bren led a buyout of Irvine Apartment Communities. The reason: The Irvine Co. was able to arrange more favorable financing to develop and operate apartments through its own lenders than through bank and Wall Street sources.
“The primary benefit is that going private gives companies flexibility of adopting long-term strategy for long-term growth,” said Murray Rudin, a partner at the Irvine office of Los Angeles-based private equity firm Riordan, Lewis & Haden.
Then there’s the practical side. Private companies have lower legal and accounting costs, Rudin said.
“A public company has to spend a lot of money in complying with SEC regulations and other matters,” he said. “The management has to go on regular road shows to meet analysts.”
But being private has its hangups. Often, companies that go from being public to private incur debt in the process, as InSight has. Raising capital can be more difficult and costly when you’re private. And investors have to be patient,cashing out of a private company can be tough.
InSight’s Plochock said his company looked at several options before opting to go private. The company hired UBS Warburg LLC as its financial adviser in January. By March, Plochock said InSight’s management and directors determined that a leveraged buyout was the best course.
InSight, which counts 150 OC workers and 1,500 overall, formed in from the 1996 merger of American Health Services Corp. and Maxum Health Corp.
