Moody’s sees execution risk in radiology firm Akumin’s $820M acquisition of Alliance Healthcare Services
Moody’s Investors Service is warning of a potential credit downgrade of Akumin after the Florida-based imaging center operator recently announced plans to acquire Alliance Healthcare Services for $820 million.
The publicly traded radiology group plans to fund the deal with a combo of cash, equity issuance and debt, which would include $200 million in new notes. Another $500 million would come from alternate debt financing to be determined prior to closing, Moody’s said Monday.
Subject to government antitrust approval, the merger would create a company offering a “comprehensive” set of radiology and oncology solutions, serving 1,000 hospitals and 154 outpatient radiology centers. Analysts see 39% upside potential in the company’s stock, but Moody’s tempered expectations with its warning.
“The review for downgrade reflects execution risks associated with the transformational nature of the acquisition, including the integration of a larger-scale, lower-rated operation with a distinct business model,” the New York-based financial services company said June 28, also highlighting the “high cost of the proposed bridge financing, some of which is expected to remain in place when the transaction closes. The review also takes into consideration heightened governance risks associated with a more aggressive M&A strategy,” it added.
Moody’s cited additional negatives, including Akumin’s “modest” scale, geographic concentration in Texas and Florida, high debt leverage, and risk tied to its “aggressive” growth strategy. On the flipside, the firm benefits from a “strong” market position, solid density, favorable payer mix, good liquidity and a track record of successfully integrating new businesses, Moody’s said.
“The rating review will focus on the final capital structure, leverage and free cash flow generation of the combined entity, as well as potential synergies, mitigants to execution and integration risks, and benefits of increased scale and diversification,” the report noted.
Akumin is headquartered in Plantation, Florida, providing diagnostic outpatient imaging in its home state along with Delaware, Georgia, Illinois, Kansas, Pennsylvania and Texas. It operates more than 125 centers and employs 175 radiologists, with annual revenues of about $250 million. The combined company is expected to produce annual revenue of more than $730 million alongside adjusted earnings before interest, taxes, depreciation and amortization of $210 million
R. Jeffrey White, MBA, Akumin's director of corporate development and investor relations, said the firm is "extremely excited" to move forward with the deal and undeterred by Moody’s report. He believes the merits of the merger will become clear, if and when they gain regulatory approval.
“Rating reviews are not unexpected given the large size and transformational nature of the Alliance acquisition,” he told Radiology Business by email. “However, we strongly believe that the increased scale, liquidity, geographic diversity, payor diversity, and growth opportunities ahead for the combined company will benefit all Akumin stakeholders.”
Meanwhile in a separate update released Tuesday, Moody’s said its ratings outlook for Alliance Healthcare Services remains unchanged after the announcement. Alliance is based in Irvine, California, and provides freestanding, outsourced, and joint-venture services in outpatient imaging, oncology and interventional radiology.
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.