Apria courts suitors

Thursday, June 30, 2005

COSTA MESA, Calif. -- Apria confirmed last month that several private equity groups have approached the company and inquired about buying it. The national has hired Morgan Stanley to contact the interested parties.
In confirming the rumors, Apria CEO Amin Khalifa also told HME News that, whether or not it sells, Apria plans to become more efficient -- and profitable -- by investing in technology that improves its order-intake and claims-collections processes.
Industry analysts believe that by improving its operational efficiencies, Apria could increase its profit margin and bring it more in line with its biggest competitor, Lincare. In the first quarter, Lincare recorded an EBITDA margin of 36.85% compared to Apria's 20.36%.
Pulling off such a makeover as a publicly traded company, however, poses problems. Specifically, Wall Street generally hammers the stock of any company that doesn't live up to growth expectations -- even if short-term pain is intended to produce long term gains.
"If we go private and we have to invest a couple of million dollars in one quarter and it costs us a couple of pennies in earnings, it is a little easier getting that done as a private company," Khalifa said. "But either way we are getting this done."
The project, he added, will take two to three years.
In the the first quarter this year, Lincare's EBITDA margin is about 15% higher than Apria's.
"There is a logic to this company potentially being taken private," said Bill Bonello, an analyst with Wachovia Securities. "If you are a private buyer you look at (the 15% difference) and it appears that there ought to be an opportunity to streamline."
If a private company bought Apria, it would do so with intentions of going public or selling at a higher price after streamlining operations and boosting profits. Of course, if the company goes out for bid, a competitor could also buy the company, Khalifa said.
Some industry watchers speculated that Apria could sell for as high as $2.5 billion.
"If we go through this process, if the price isn't right, a deal won't be struck," Khalifa said.
Apria has another reason for exploring a possible sale. Apria officials have been unhappy with how Wall Street has valued the company compared to how it values Lincare. For example, Apria's stock rose from $31 a share to $36 following news of its possible sale. It's market capitalization stands at about $1.8 billion, and its P/E ratio stands at about 15.99. In mid June, Lincare's stock was selling at $43.70 a share. It's market capitalization was $4.3 billion, it's P/E ratio was 17.63.
Even if Apria successfully streamlines operations, chances are it still won't excite Wall Street to the degree Lincare does. That's because Apria -- compared to Lincare's focus on the Medicare oxygen business -- will still provide multiple product lines to multiple payers.
"Lincare's transparency is high, and you know exactly what you are getting," said the analyst. "Apria is into everything, and there is not as much visibility. Their managed care business is a double edged sword. The Medicare cuts don't hit as hard, but what MCOs giveth, they can taketh away."