Arcadia: 'They probably need money'

Sunday, April 29, 2007

SOUTHFIELD, Mich. - Arcadia Resources announced earlier this month that it intends to sell a good chunk of its DME business for $16.5 million, a sign that the once rapidly growing company may be hurting for cash, say industry watchers.

"They probably need money, and they're looking for ways to find it," said Balaji Gandhi, an analyst with the New York-based investment firm Oppenheimer & Co.

The unidentified buyer--described in a release as a "regional provider of therapeutic equipment and services"--obtains all DME operations except Arcadia's Florida operations, its largest, for $9.5 million in cash and $7 million in long-term and short-term notes.

A quick look at Arcadia's recent SEC fillings indicates that the company has hit hard times. In addition to restructuring (See HME News May 2007), Arcadia has burned through $10 million in operating cash flow in the last three quarters, pointed out Tyson Graygor, an analyst with the Boston investment firm Provident Healthcare Partners.

"The ability to produce operating cash flow is a key operating metric for any enterprise--without cash flow a company is unable to pay its bills," he said. "The sale of the DME piece will likely give Arcadia a much needed infusion of cash."

It's also possible, say industry watchers, that Arcadia has realized that the DME companies it acquired in the past few years aren't the revenue generators they expected.

"They could be realizing (the companies) are junk, and they want someone to take them off their hands," said consultant Schuyler Hoss, president of Northwest Healthcare Management in Vancouver, Wash. "They could be retrenching to their sustainable core."

In a release, Arcadia stated that it plans to redirect resources toward expanding its pharmacy and medical clinic businesses.

Industry watchers noted that Arcadia "keeps changing its business model."

"I met them in 2004, and they pitched themselves to me as an integrated homecare company--not just DME but home care," Gandhi said. "Then they were done with DME in Sears. Now they're into health clinics. Ultimately, I don't think they're making any money."

One industry watcher pointed out that Larry Kuhnert, Arcadia's president and a former Rotech executive, "unexpectedly" resigned from the company's board of directors April 6.

"He was their link to HME," said Bruce Burns, president of the Albuquerque, N.M.-based M&A firm Affinity Ventures.