Back to the future

Back to the future

HEALTH CARE by Jean Gruss | Editor/Lee-Collier

After less than four years as a publicly traded company, Radiation Therapy Services returned to private ownership. It's a deal the founders of the company couldn't resist.

For the founders of Radiation Therapy Services, the burdens of running a public company may have been too much to bear, but it certainly turned out to be lucrative.

Just ask Daniel Dosoretz, co-founder, president and CEO of Fort Myers-based Radiation Therapy, the nation's largest operator of radiation treatment centers. It operates 84 treatment centers under the 21st Century Oncology name in 16 states.

Dosoretz is blunt about his distaste for spending so much time dealing with the regulatory burdens of a public company instead of focusing on his cancer patients. "We were fatigued," he says.

But in less than four years, the company's value more than doubled from $13 per share at its initial public offering on June 23, 2004, to the $32.50 per share that New York private equity firm Vestar Capital Partners paid in cash to shareholders on Feb. 21. The $1.1 billion deal netted the three founders - Dosoretz, Howard Sheridan and Michael Katin - $234 million.

But they may have waited too long. The deal was in motion before the credit turmoil that began last summer. Prospective acquirers were ready to pay as much as $40 a share in April 2007.

In securities filings and interviews, executives involved reveal how they managed to keep the deal alive to take Radiation Therapy private despite the stock- and credit-market turmoil swirling around them. They reached around the globe to as far as Japan and France to line up the financing and required the founders to plow back some of the windfall they earned into the private company.

It's a lesson that reveals the advantages and drawbacks of being a public company. It also shows that companies are often at the mercy of financial and industry trends that are beyond their control.

Good old days

In 2006 and early 2007, you couldn't open up the financial newspapers without reading about the next blockbuster acquisition deal by private equity. Executives were eager to get away from the regulatory burdens imposed by the post-Enron Sarbanes-Oxley legislation and increasingly vocal shareholder activists. Meanwhile, private equity companies were trying to deploy investor cash and cheap debt as fast as they could during the boom.

Erin Russell, a principal at Vestar, remembers how easy it was to get financing to acquire Radiation Therapy. "When we were initially in the process, we had banks clamoring to fund the deal at very attractive terms," she recalls.

It was no surprise then that Dosoretz told his board of directors in the spring of 2007 that they should start exploring ways to take advantage of the situation. On a personal level, he disliked the glare of running a public company. Dosoretz, who still sees cancer patients twice a week, says he was spending too much time trying to meet quarterly expectations rather than finding ways to care for his patients.

"That amount of time is better spent trying to get a better system," he says.

That's a surprising admission from a man who labored for six years to take Radiation Therapy public. Dosoretz and 19 other investors argued then that going public would give the company the ability to grow the business, invest in new technology to stay competitive, repay debt and take some cash out after 16 years building the business.

But the regulatory shackles and shortsightedness of most investors outweighed any of these benefits. Dosoretz and the board concluded that taking the company private was a better option.

"The issue was we wanted to grow relatively fast," Dosoretz says. The company wanted to acquire existing radiation treatment centers, build new ones, buy expensive new equipment and hire more physicians. Private equity firms can do that better because they have the financial means and are willing to forgo short-term earnings in favor of long-term returns.

Dosoretz knew that investing in the business would mean sacrificing earnings in the short term and the company's stock price likely would take a hit. A decline in the value of the stock would have made it harder for the company to obtain financing to grow. Stock investors generally cast a wary eye on any company that dilutes their holdings by issuing more shares or taking on more debt and giving bondholders more power.

"You need to add infrastructure [and] it could cost you in earnings," Dosoretz says. "I don't know if the markets appreciated it."

What's more, there was considerable uncertainty whether insurance reimbursement would be sufficient to pay for Radiation Therapy's new equipment and facilities. The board was concerned that the government's Medicare and Medicaid payments would shrink after the presidential election. Medicare and Medicaid account for half of Radiation Therapy's annual revenues, a fact that is not surprising considering cancer is mostly a disease that strikes older people.

In addition, the relationship between oncologists and radiation-treatment centers was shifting. Historically, oncologists referred cancer patients to radiation-treatment centers. But as lower reimbursements started hitting oncologists, these doctors started their own radiation-treatment centers in direct competition with Radiation Therapy.

Finally, and perhaps most significant, Vestar was ready to pay a significant premium over the market price of Radiation Therapy's stock. When the deal was publicly announced Oct. 19, Vestar had agreed to pay a 51% premium over the closing price of the stock that day. Together, four company insiders -Dosoretz, Katin, Sheridan and James Rubenstein - controlled 40% of Radiation Therapy's shares.

Although Dosoretz personally netted $127 million from the deal - the most of any insider - he will continue to run Radiation Therapy. Under the terms of the deal, Dosoretz reinvested $45 million in the now-private company and will earn a base salary of $2 million a year. He will also be eligible for a bonus of no less than $1.9 million a year for the next five years. In 2006, Dosoretz earned a base salary of $900,000 and a bonus of $971,425.

"I don't plan to retire any time soon," says the 55-year-old Dosoretz. "I have the same role, I'm working hard and I have a long-term contract." He's got good genes, too. "My father is 85 years old and he goes to work every day," Dosoretz says. And he adds: "The sad thing is I'm becoming the age of my patients."

Market turmoil overcome

In early 2007, private-equity deals to acquire public companies were at their zenith and there seemed to be no end to the euphoria. Investment bankers from Wachovia Capital Markets told the board in April that seven prospective buyers were interested in buying Radiation Therapy for as much as $40 a share.

To make sure that the transaction was fair for all shareholders, Radiation Therapy's board of directors created a special committee composed of outside directors to explore the opportunity. They included Rabbi Solomon Agin, retired banker Leo Doerr, retired hospital consultant Herbert Dorsett and real estate developer Ronald Inge. Together, the four held fewer than 8,000 shares of the company's stock.

The special committee of the board hired its own legal counsel, Holland & Knight, and investment banker, Morgan Joseph & Co. By then, Vestar and six other prospective buyers had signed confidentiality agreements and began pouring over Radiation Therapy's books.

After reviewing Radiation Therapy's books, Vestar was not the top bidder. Another unidentified bidder offered to buy the company for $38 a share, higher than Vestar's initial bid of $36.75. All offers required management to reinvest some of their windfall into the company. On the day the bids were submitted, Radiation Therapy's stock closed at $25.79.

Then, two events in the summer threatened to derail the process. The Dow Jones Industrial Average plummeted 600 points the week of July 23 as investors realized the magnitude of the subprime-lending problem and its potential to spread to the broader economy. Given the uncertainty, lenders began to tighten their lending standards to private-equity firms.

Wachovia had initially agreed to finance Vestar's deal, but when the credit crisis unfolded it told Vestar it wasn't going to do it alone.

"We were at the five-yard line when there was a severe dislocation," says John Hudson, Jr., managing director and group head of health care investment banking for Wachovia Securities. "The markets got a lot worse."

"We had to scramble and press our relationships with Wachovia to line up support and syndicate the deal," says Vestar's Russell. Vestar, which has investments in Europe and Asia, had to reach around the globe to help Wachovia spread the risk to other lenders. Eventually, French-based BNP Parisbas Securities Corp. and Japan-based Sumitomo Mitsui Banking Corp. agreed to provide a portion of the debt.

At the same time, on Aug. 2, Radiation Therapy disappointed investors when it lowered its estimates for the year because of the risk of lower insurance reimbursements and increased capital expenditure on new technology, among other things. As a result of these two events, the special committee tabled discussions, hoping the crisis would pass.

Radiation Therapy also provided bidders with revised forecasts for future years. For example, 2008 earnings originally forecast at $56.6 million were revised down to $41 million.

By September, seeing that the credit-market crisis would not abate, Radiation Therapy's special committee reopened the bidding for the company. Not surprisingly, the bids came in substantially lower as the cost of financing surged and investors realized the company's prospects weren't as rosy as initially projected. The revised bids ranged from $27 to $34, with Vestar bidding $32.

The special committee then decided to negotiate with Vestar because time was of the essence. The lone $34-per-share bidder requested three weeks to review Radiation Therapy's books while Vestar, the second-highest bidder, said it would raise its bid to $32.50 if it received a 10-day exclusivity period. The committee determined it was too risky to wait and agreed to Vestar's terms. In its opinion, Morgan Joseph said the $32.50 bid was fair to all shareholders.

On Oct. 19, Radiation Therapy's board approved the acquisition and announced the deal to the public. The deal closed Feb. 21, narrowly escaping a much more serious crisis would take down Bear Stearns, one of the major Wall Street firms.

Radiation Therapy Services Income Forecast

When it was exploring the sale of Radiation Therapy Services, the company's special committee of the board of directors presented financial forecasts to prospective bidders. Below is the company's condensed income statement forecast for each fiscal year ending Dec. 31 ($ in thousands).

Income statement 2008 2009 2010 2011 2012

Revenues $491,691 $555,411 $622,632 $678,669 $726,176

Total direct expenses 224,743 252,194 282,956 308,422 330,011

Gross profit 266,948 303,217 339,676 370,247 396,165

Net income 41,920 53,198 65,535 74,879 83,897

Source: Securities & Exchange Commission

REVIEW SUMMARY

Company. Radiation Therapy Services

Industry. Health care

Key. Being publicly traded may not be the best path for a fast-growing health care company.