Lake Forest-based InSight Health Services Holdings Corp., a provider of medical scanning services with yearly sales of $300 million, is offering creditors nearly all of the company in exchange for forgiving a big chunk of its debt.
InSight filed plans with the Securities and Exchange Commission last month to offer 87% of its common stock to bond holders in exchange for $200 million in debt due in 2011.
So far, close to half of InSight’s debt holders are on board with the offer, Chief Executive Bret Jorgensen said.
Jorgensen declined to name the debt holders. Nor were they spelled out in InSight’s filing. Many are Wall Street debt investors, he said.
The company is looking to get 95% of its debt holders on board and complete the offering in the second quarter, Jorgensen said.
The offering is the carrot. The stick: a possible bankruptcy filing if the offer doesn’t pan out, according to InSight’s filing.
“That’s not the path we’re on, but if we chose to, we could use that as a tool to force any holdouts to do the exchange,” Jorgensen said. “We’re parallel-pathing just to make sure the exchange offer remains on track.”
The privately held company runs about 220 diagnostic medical imaging centers, including some mobile units that call upon hospitals and other healthcare facilities. InSight has more than 2,100 workers.
Competitors include Alliance Imaging Inc., an Anaheim company with about $460 million in yearly sales.
For the six months through December, InSight had sales of $145 million, down 5% from the year-ago period. It lost $55.7 million for the six months, largely due to an impairment charge. A year earlier, it lost $12.3 million.
The company paid about $27 million in interest on its debt in the six months through December. As of Dec. 31, InSight had $503 million in debt.
InSight’s exchange offer would allow the company to reduce its debt and interest payments by taking out $200 million in subordinated bonds and swapping “it for a substantial amount of ownership of the company,” Jorgensen said.
Private equity investors J.W. Childs Associates LP of Boston and Halifax Group LLC of Washington, D.C., now own InSight after taking the company private five years ago. J.W. Childs owns 80%, while Halifax owns 20%.
The firms are set to give up most of their stakes to debt holders that swap bonds for stock.
“So it’s basically a transfer of most of the private equity sponsors’ ownership stake to those debt holders,” Jorgensen said.
The firms likely will write off their investment in InSight.
“I’m sure they’ve already substantially written down the investment,” Jorgensen said.
J.W. Childs didn’t return a call for this story.
InSight has been squeezed by reductions in federal funding for its services as well as pressure from insurers for lower prices, according to Jorgensen.
“The industry has undergone quite a bit of stress from both a cost and a reimbursement perspective,” he said.
The Deficit Reduction Act of 2005, which President Bush signed in early 2006, “included some very significant reductions for the diagnostic imaging industry,” Jorgensen said.
“Where we found ourselves as a company is simply with a level of debt that’s not sustainable in the future,” he said.
In InSight’s filing, the company illustrates its predicament in a table outlining cash from operations and expenses. In the 12 months through June 2005, the company generated $64 million in cash, enough to cover its $45 million in interest payments for the period.
For the 12 months through June 2006, InSight’s cash from operations fell to $38 million, while interest payments rose to $51 million.
“There’s not anything pressing us to do this transaction today, other than we’re trying to get ahead of the need to do this and basically try to de-leverage the business,” Jorgensen said.
If the offer’s completed, InSight would be left with about $300 million in debt, a level Jorgensen said would be manageable.
In November, InSight retained New York investment bank Lazard Fr & #233;res & Co. to explore options.
“They’ve been an adviser to our management team and to our board to find out what kinds of things we could do to put the business in a more stable footing going forward,” Jorgensen said of Lazard.
The investment bank also is representing InSight in talks with bondholders, he said.
Jeffries & Co., another investment bank, is representing some of InSight’s bondholders on the other side of the deal.
The prospect of selling InSight hasn’t really been explored, Jorgensen said.
“We don’t intend to sell the company,” he said. “One of the problems, of course, is if you’ve got $500 million in debt, it makes the business a little harder to sell. So that’s really not an area we were focused on.”
InSight’s offer requires bondholders to buy into the company’s prospects.
The deal should position InSight for “what we think will be an improving market in the diagnostic imaging space,” Jorgensen said.
InSight could look to acquire smaller players that may not be able to survive after the recent reimbursement cuts, he said.
The sector already has seen some consolidation. Last year, what’s now RadNet Inc. of Los Angeles acquired Dallas-based Radiologix Inc.
Hospitals are another source of competition for InSight and other scanning providers. The company’s mobile operation, which makes up about 35% of the business, has been affected by hospitals starting their own imaging centers instead of using outside providers.
“Large-volume accounts do have a tendency at some point to go in-house,” Jorgensen said.
InSight went private in 2001 in a $100 million buyout.
Back then, InSight opted for a buyout as the best option for its big investors at the time, Carlyle Group and General Electric Co., which owned about 67%.
Three years later, InSight filed plans with the SEC to offer a combination of debt and equity worth up to $675 million for subsidiary InSight Health Services Corp.
The company planned to issue income deposit securities, or shares representing a combination of stock and bonds.
InSight called those plans off in 2004 “due to current market conditions for public offerings.”
The company came about after the 1996 combination of American Health Services Corp. of Newport Beach and Maxum Health Corp., which was based in Texas.
Both companies were publicly traded providers of diagnostic imaging services.
