RadNet sees potential midsize and larger acquisitions on its horizon

RadNet Inc. sees potential midsize and larger acquisitions available to the company in the coming years, leaders told attendees Wednesday at the JP Morgan Healthcare Conference in San Francisco. 

In recent years, the Los Angeles-based imaging center operator has focused on smaller “tuck-in” deals that increase market share in geographies where it already operates. RadNet previously estimated in June that it’s sitting on roughly $700 million in cash and wants to use these funds to fuel expansion. 

Currently, the company operates about 400 outpatient centers, concentrated in California, Maryland, Delaware, New Jersey, New York, Florida, Texas and Arizona. 

“In the normal course of our business, we acquire smaller operators. So, tuck-in transactions mostly in our markets is something that we do,” Chief Financial Officer Mark Stolper told attendees Jan. 15. “We can generally buy these operators at 4 to 7 times EBITDA [earnings before interest, taxes, depreciation and amortization]. And because they're in market, we are able to enjoy some synergies by consolidating or what we jokingly call ‘RadNet-ize’ them into our operations. There are some larger and midsize acquisitions that we think will be available to the company in coming years. So, we're looking to do that as well.”

RadNet spent over $54 million on acquisitions in the first three quarters of 2024, according to a recent filing with the Securities and Exchange Commission. For instance, the company paid $3.53 million to purchase Antelope Valley Imaging and its three outpatient centers in Los Angeles County. Another $10.34 million went toward the procurement of Grossman Imaging Centers in California, with two locations in Oxnard and two more in Ventura.  

Stolper said the company also has been spending “aggressively” to reinvest in its core imaging business and open new “de novo” centers. RadNet is facing “very high demand” in many markets, with backlogs of patients waiting for radiology services. It opened eight newly constructed facilities in 2024 and has 15 more “de novo projects” in the works for 2025. 

RadNet also plans to invest “substantially” in its digital health platform, DeepHealth, introduced at the Radiological Society of North America annual meeting in 2023. It’s particularly focused on building implementation teams to roll out the software platform across the company, along with reaching external customers and strengthening sales and marketing. The product is centered around DeepHealth OS, a workflow engine that integrates enterprise-wide data streams, offering personalized applications for multiple roles on the radiology team. 

“When I was here [at the JP Morgan Healthcare Conference] a year ago and we talked, we didn't have almost any of these products other than the early versions of the AI,” Greg Sorensen, MD, RadNet’s chief science officer, told attendees. “We've really been working hard and most of the team has been focusing on building them. Now they're built, and so this year is deployment and rollout and scale up. So, that will take some capital.”

An attendee also asked RadNet leaders about their comfort level in using credit to further grow the organization. Stolper noted that the company’s debt-to-earnings ratio is at under 1x, and with hundreds of millions on hand, he sees little need to increase that number. 

“We're throwing off a lot of cash,” Stolper said. “The types of investments that Greg and I have talked about today—either in the core business in de novo centers, or the investments that we're making in digital health—we're doing all out of free cash flow. So, that's not eating into this small war chest of money that we have on the balance sheet. I think the only way we would lever up materially from here is if there were a very, very compelling, very value-creating, larger-scale acquisition. And even with that, we'd want to keep below 3x on a net-leverage basis. So, if we were to do something of scale, we would either raise that capital through a combination of debt or equity or use our stock as partial tender in some sort of a scale transaction.”

As RadNet saw interest rates creeping up over the last 36 months, Stolper and colleagues thought it would be “prudent, especially as a public company,” to pare down debts. Other imaging center operators have taken on heavy credit balances in recent years as they seek to acquire competitors and invest in technology. (He didn’t name names, but fellow California-based industry giant Rad Partners had obligations of about $2.4 billion at last count, with a debt-to-earnings ratio of 8x after restructuring.)  

“We're highly unlevered for our industry,” Stolper told attendees. “Our industry is a capital-intensive one. There's a requirement each year to reinvest in your equipment and your facilities, and so most of our competitors—at least other scale competitors in our industry—tend to be run with much higher leverage. Many of them are private equity-backed, and a lot of them took out a substantial amount of leverage 3, 4, 5 years ago when they got into these investments. Some of them didn't hedge or buy interest rate caps, and so they got caught up in the rising interest-rate environment. So, I think what that has allowed us to do is, as new acquisitions have popped up, it gives us a better ability to or more of a competitive advantage to look at those acquisitions.”