Moody’s sees ‘significant execution risk’ as Radiology Partners integrates Mednax’s imaging business
Moody’s Investors Service sees “significant execution risk” as Radiology Partners attempts to integrate Mednax’s imaging business line, according to a recently published update.
The El Segundo, California-based mega practice just finalized the deal last month, doling out $885 million while ballooning its rad roster to 2,400. Now comes the difficult work of attempting to integrate the two enterprises, and the noted ratings agency sees some challenges ahead.
Rad Partners, for one, has “very high” financial leverage, taking on debt to fuel this and previous acquisitions, Moody’s noted. On the plus side, it has also increased revenues tenfold over the past five years and will further bolster those numbers by about 40% after the Mednax purchase.
“The company’s ratings benefit from an industry with stable business prospects and favorable payer mix,” the Jan. 14 review noted, adding that RP is also buoyed by its “dominant position as the largest player in a highly fragmented industry.”
In a recent interview, Chairman and CEO Rich Whitney labeled integration as the biggest challenge ahead while the two companies merge into one. He anticipated it would take 6-9 months to work through the process, and said they’re using a “best of both” philosophy.
“There’s not a notion that ‘the RP way is the right way,’ and we should go in and change everything in the Mednax practices. We encourage them to think the same way.” Whitney told Radiology Business. “You bring two high-quality groups of professionals together, undoubtedly, there are going to be things that Mednax Radiology was doing better that we hadn’t even though of here at RP, and presumably vice versa.”
RP will add two brand new physical markets in the deal: South Florida, which Whitney sees as a high-growth opportunity, along with Connecticut, where Jefferson Radiology has built a strong base. They’re also strengthening their position in established geographies such as Nashville, Tennessee, along with Las Vegas and Houston.
Company officials said previously that they plan to continue growing beyond those areas, as RP currently only accounts for about 7% of the total U.S. market. Moody’s echoed that sentiment in a ratings update posted in December. The agency noted that RP has solid liquidity, with $102 million in cash and a $300 million revolving credit line, which remained untapped after the Mednax deal.
Moody’s anticipated that the practice could generate more than $100 million in free cash flow. But it expects RP to “remain acquisitive,” while also footing significant transaction and business integration costs associated with the acquisition over the next 12-18 months.
The rating’s agency said it expects Rad Partners to remain “aggressive,” reflecting its more than 60% private equity backing. About 20.1% of the firm is owned by New Enterprise Associates, while Future Fund holds 10.3% and Starr another 32.4%. Radiologists make up the balance. All told, annual revenues amount to about $1.9 billion after the Mednax sale.
“Since physicians also own a significant proportion of the company, they will also have a material influence in deciding the company's policies. Over time, Radiology Partners may need to provide liquidity to doctors as they retire which raises the risk of cash outflows,” Moody’s noted back in December.
RP Chief Development Officer Cameron Cleeton noted that such updates from Moody's are common after a large acquisition. He expressed optimism around the months ahead, touting the firm's strong balance sheet and previous success following big acquisitions.
"We are extremely confident in our ability to execute the integration based on our track record," he said in a statement. "Radiology Partners has integrated numerous practices each year for the past several years, and most often we are executing on multiple integrations at once," he added.
Marty Stempniak has covered healthcare since 2012, with his byline appearing in the American Hospital Association's member magazine, Modern Healthcare and McKnight's. Prior to that, he wrote about village government and local business for his hometown newspaper in Oak Park, Illinois. He won a Peter Lisagor and Gold EXCEL awards in 2017 for his coverage of the opioid epidemic.