Rotech to emerge from bankruptcy: 'Here we go'

Sunday, March 31, 2002

ORLANDO, Fla. - Rotech Medical prepared to emerge from Chapter 11 bankruptcy in late March as a separate company from its troubled parent, Integrated Health Services.

"It will be wonderful to be out," said Rebecca Meyers, Rotech's chief legal officer. "It's kind of fun. Here we go."

Here we go is right, say industry watchers.

By several accounts, Rotech emerges from Chapter 11 not only with a new name, Rotech Healthcare, but with a solid balance sheet, a good business model and a strong entrepreneurial spirit that could portend some significant growth and additional competition for Lincare and Apria. While in bankruptcy, Rotech President Steve Linehan laid the groundwork for just that, working to boost the national's respiratory business and shore up underperforming branches.

"You turn these guys (branch managers) loose with a little back up and the knowledge that from day to day they are going to still be in business, and I think they could wake up," said homecare consultant Arnold McMann of the Corridor Group.

Integrated acquired Rotech in 1997 for $915 million dollars, expecting synergies between Rotech and Integrated's home health and nursing home components. Those synergies never materialized, and when Integrated filed for Chapter 11 bankruptcy in Feb. 2000, it dragged Rotech in with it, even though by all accounts the national HME was profitable.

Coming out of bankruptcy, Rotech will be owned by its creditors and must pay Integrated's creditors $500 million. (Integrated remains in bankruptcy.) But because Rotech no longer has to clear every decision through bankruptcy officials, the administrative savings should be significant.

Rotech's emergence from Chapter 11 could also pay dividends for other HMEs.

"When they come out of bankruptcy, it is a great thing for mergers and acquisitions," said M&A expert Dexter Braff. "I would not be surprised if they are interested in acquisitions. You take someone who was out of the market for a while and put them back in and that can't be bad."

There's already been talk that Rotech has contacted potential acquisition targets.

While Apria and Lincare have adopted a focused integrated approach, Rotech is a comparatively loose network of locations, often doing business under names other than Rotech.
Rotech operates primarily in second tier markets, and because of that referral sources and patients have fewer HMEs to chose from. Consequently, Rotech has not jettisoned supplies and other unprofitable/low margin products lines as have Apria and Lincare. This diversity of product leads at least one industry watcher to bet that in the long run Rotech has greater growth potential than Lincare or Apria.

"Rotech is going after the respiratory business and they've got more at bats," said Jack Eskenazi, senior vice president of American Capital. "They can get respiratory business from their wheelchair, their rehab, from their ostomy business, from all their other modalities that Apria and Lincare don't participate in. I'd bet on Rotech." HME