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MEDNAX (MD) Set to Acquire Cardon Outreach for $400M

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MedData, a division of MEDNAX (MD - Free Report) , recently announced its plan to acquire Revenue Cycle Management (RCM) System provider Cardon Outreach for $400 million.

The buyout is expected to be accretive to earnings on an immediate basis. MEDNAX expects the takeover to add 6 cents to earnings initially and scale to 14 cents annually, which is expected to increase in the “foreseeable future”, driven by anticipated low double-digit organic revenue growth.

Cardon offers RCM solutions to hospitals and healthcare centers. The company has a extensive client base of more than 800 hospitals and healthcare facilities across 46 states. The company is currently expected to generate EBITDA of $36 million in full-year 2016.

Moody’s Raises Eyebrows

Although frequent acquisitions have been one of the key growth drivers for MEDNAX in recent times, credit research firm Moody’s believes that the latest deal is slightly credit negative. Moody's expects the deal to slightly increase MEDNAX's financial leverage.

Notably, in Jun 2015, the company amended its credit facility, which increased the revolving loan commitments to $1.7 billion from $1.3 billion in addition to a $200 million term loan. The company also has the option to raise the credit limit to $2.2 billion on an unsecured basis. As of Mar 31, 2016, available borrowings under MEDNAX’s credit facility were $1.2 billion.

Although increasing financial leverage is a concern, we believe higher revenue contribution from the acquisitions will drive growth in the near term.

Effect on Revenues

MEDNAX noted that 85% of the first quarter of 2016 revenue growth (18% year over year) came from recent acquisitions. The vRad takeover (May 2015) contributed less than half of this growth, as did practice acquisitions; while Alegis accounted for the remainder.

We believe MEDNAX will continue to pursue acquisitions of expert private physician groups in different specialties like neonatology, anesthesiology, maternal-fetal medicine and pediatric cardiology specialties. This will drive its results over the long haul.

Zacks Rank & Key Picks

MEDNAX has a Zacks Rank #3 (Hold).

Better-ranked stocks in the medical space are AMN Healthcare Service , Adeptus Health Inc. (ADPT - Free Report) and VCA Inc (WOOF - Free Report) . While AMN Healthcare holds a Zacks Rank #1 (Strong Buy), both Adeptus Health and VCA carry a Zacks Rank #2 (Buy).

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