MModal Low Buyout Premium Signals JPMorgan Bump: Real M&A

MModal Inc.’s agreement to be taken private by JPMorgan Chase & Co. at the medical information industry’s lowest premium in seven years won’t be enough to cement the deal, according to traders who wager on acquisitions.

For eight straight days, MModal closed above the $14-a-share proposal from JPMorgan’s One Equity Partners that valued the company at about $1.1 billion including net debt. The 9.2 percent premium to MModal’s 20-day average was about a quarter of the average among similar-sized deals for medical information systems providers, according to data compiled by Bloomberg. MModal shares were 1.9 percent higher than the bid yesterday, more than any other pending U.S. deal greater than $200 million, a sign traders expect a sweetened offer, the data show.

After accepting the buyout unit’s proposal on July 2, Franklin, Tennessee-based MModal disclosed in a regulatory filing that it had rejected a $17-a-share bid from a competitor because of antitrust concerns. MModal is still worth at least that much in a takeover based on the company’s projections that profit will rise more than 45 percent next year, according to Caris & Co. While MModal said its biggest shareholder would tender its 31 percent stake, Tullett Prebon Plc and GFI Group Inc. said One Equity still may need to increase its offer to win over investors and fend off a potential rival bid.

MModal “is trading higher based on the premise that there’s this $17 offer out there and there is a wait-and-see approach,” Sachin Shah, a Jersey City, New Jersey-based special situations and merger arbitrage strategist at Tullett Prebon, said in a telephone interview. “They should not have rushed to the deal. If you’re going to go private, it should not be at $14, it should be higher. This is a growth subsector of tech.”

Patient Data

Dave Levy, an outside spokesman for MModal, said the company couldn’t comment on the deal process beyond the information that has been made public. Tasha Pelio, a spokeswoman for JPMorgan in New York, said the company declined to comment on One Equity’s bid for MModal or whether it would consider increasing the price.

MModal develops speech-recognition and data-processing tools for capturing and organizing patient data used in electronic health records, medical coding and billing. Its clients include about 3,000 hospitals and clinics and 850 physician practices, as well as electronic health record application providers and medical transcription organizations, according to a March company filing.

MModal’s shares climbed 34 percent this year through July 2, the day it announced the agreement with One Equity. The next day, MModal rose past the offer price, and the shares closed at or above the bid level on all but three trading days since.

Higher Price

The stock ended yesterday at $14.26, 1.9 percent higher than One Equity’s bid and a sign some merger arbitragers are wagering that a higher offer will emerge.

“Clearly, investors think that there’s another offer coming,” Steven Halper, a New York-based analyst at Lazard Capital Markets LLC, said in a phone interview.

Today, the shares rose 0.8 percent to $14.37.

MModal hired financial advisers in March to help consider possible transactions after holding talks or receiving expressions of interest in previous months from suitors including an unnamed competitor and One Equity, according to a July 17 filing.

As MModal gauged interest from financial firms, 20 potential bidders including One Equity signed confidentiality agreements.

Sell Now

By June, most bidders had dropped out, and MModal was contacted by the unnamed competitor over a potential sale, the filing said. The competitor -- most likely Nuance Communications Inc., according to Halper and Tullett Prebon’s Shah -- offered as much as $17 a share in cash and stock. The bid was rejected in favor of One Equity’s $14 cash proposal, in part because of concerns antitrust approval may take too long, the filing said.

MModal “is basically saying, ‘Now is the time to sell,’” Shah said. “From my perspective, shareholders should not approve the $14 deal and the board should go back to Nuance because I think they may be still interested.”

Richard Mack, a spokesman for Burlington, Massachusetts-based Nuance, said he couldn’t comment on speculation as to whether the company approached MModal or is considering a bid.

The disclosure of the other bid “gives people hope that perhaps someone else may come in” with a higher offer, said Leo Carpio, an analyst at Caris in New York.

One Equity’s bid was about 9.2 percent higher than MModal’s average share price in the 20 days before the announcement, the smallest premium among takeovers valued at more than $300 million in the medical information systems and health-care cost containment industries since August 2005, according to data compiled by Bloomberg.

Earnings Multiple

Including net debt, the buyout values MModal at 12.4 times earnings before interest, taxes, depreciation and amortization, 20 percent less than the median multiple for deals in the group, the data show. Based on analysts’ estimates for 2012 Ebitda, the deal values MModal at 8.7 times. Nuance, a $6 billion maker of voice-recognition software, offered to buy smaller rival Transcend Services Inc. in March for $302 million, valuing the company at 12.63 times Ebitda, data compiled by Bloomberg show.

“If you compared the deal metrics to the Transcend deal, that would translate to $14.75 to $14.80” a share for MModal, Alfredo Scialabba, a special situations analyst for GFI Group in New York, said in a telephone interview.

Caris’s Carpio estimates MModal is worth $17 to $18 a share in a takeover, citing in part earnings projections included in the company’s July 17 filing. That would be as much as 29 percent more than One Equity’s offer. MModal estimated Ebitda will climb 47 percent in 2013.

‘Darn Cheap’

“People are trading on the expectation that anybody who wasn’t participating in the first round of this deal might come back and look at those revised earnings projections and decide this company’s just too darn cheap and too attractive,” Carpio said.

Halper at Lazard said it’s unlikely that a new suitor would emerge, given the number of firms that participated in the deal process and already had a chance to make an offer.

“A lot of companies walked away or offered less,” Halper said. “At this point, I can’t imagine another company coming out of the blue.”

With MModal’s largest shareholder, SAC Capital Advisors LP, agreeing to go along with One Equity’s bid and tender its 31 percent stake, the buyout firm may have an easier time gaining enough investor support at the current price, Halper said.

Worth Wait

Still, knowing that another bidder was willing to pay more for MModal may keep some shareholders from agreeing to One Equity’s terms, Tullett Prebon’s Shah said.

While a richer bid from Nuance or another competitor could take more time to clear regulatory hurdles than MModal’s management might prefer, the higher potential returns would be worth the wait for shareholders, he said.

For management, “it’s a bird in the hand situation” to accept JPMorgan’s price, Shah said. For investors, “you’re definitely willing to wait for an extra $3” a share.

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