RADNET INCORPORATION: FINANCING AN ACQUISITION Harvard Case Solution & Analysis

RADNET INCORPORATION: FINANCING AN ACQUISITION Case Solution

Problem Diagnosis

            This case deals with the financing issues surrounding the acquisition of Radiologix by RadNet Incorporation in July 2006. The CFO of the acquiring company, Mark Stolper, is planning on how to raise the required financing of $ 363 million for financing this acquisition. When this acquisition would be completed, both the companies would merge to form the largest private diagnostic imaging provider in the US. Stolper joined RadNet Incorporation in the year 2003 and at that time, the debt of the company was too high and the balance sheet showed the wrong amount of the debt for the company.

However, over the years, he had taken several steps to renegotiate and refinance the existing debt of the company and helped the company to grow out of its debt burden. Now in order to finance the acquisition of Radiologix, he had two financing options, which were debt and equity and within equity, there are several other options or tranches and a combination of these debts could also be used. The goal is to finance the transaction in a way, which enhances the flexibility and the financial strength of the company.

However, the issue is that, the entire transaction worth $363 million could not be financed through the first lien debt and the secondary debt would also be required however, his financial advisors differ in their opinions and one of them suggests the use of second lien debt and the other suggests the use of high yield bonds. With the analysis and the sensitivity to the profitability and cash flows of RadNet Incorporation, a final decision needs to be made regarding the best combination of debt financing, its relative size and the terms of the financing.

Case Analysis  

            First of all, we begin with the selection of the most preferred financing option from debt and equity and then we discuss the selected financing option.

Financing Options

            The two financing options available to RadNet Incorporation for financing the acquisition of Radio logix, which is worth $ 363 million, are debt financing and equity financing. Both of these are briefly discussed and then a final decision is made.

Equity Financing

            Equity financing refers to the issuance of the shares to raise the required financing through external sources. Through this financing method, the external investors become the owners of the company partially or have complete control if they are allowed to acquire more than 50% shareholding of the company. This method is more expensive as compared to debt financing. However, as stated in the case that the stock price for the stock of RadNet Incorporation has been low recently, therefore it is not at all advisable to attempt such a size able equity issue and this might create a negative signaling in the market regarding the operating performance of the company. Thus, the preferred financing option for the company would be to finance the deal with debt financing.

Debt Financing

            Although the debt position of the company would not be good and it is costly for the firm to raise additional debt of such size however, this was still the preferred option for RadNet Incorporation. Even though such huge financing through debt would give a non investment grade rating however, the lower spreads on the high yield long term bonds would make the borrowing environment favorable for the company according to the bankers of Stolper. The spread on the high yield bonds had just averaged around 350 basis points from the higher spreads in the 2002 and 2003 period.................

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