February 25, 2011, 10:16 am

MEDH - MedQust

Note that MEDH priced 4.5 million shares at $8. Insiders opted not to sell and the deal came at a 27% discount to the middle of the initial range. That combination allowed the deal to work short term and gives it a much better chance to work mid-term as well. Still some issues here, but an attractive pricing. Tradingipos.com does own shares from $8.50 with a stop-out set on a new low $8.29.

MEDH - MedQuist

MEDH - MedQuist plans on offering 9 million shares(assuming overs) at a range of $10-$12. Insiders will be selling 4.3 million shares in the deal. Lazard, Macquarie and RBC leading the deal, Loop Capital co-managing. Post-ipo MEDH will have 51.1 million shares outstanding for a market cap of $562.1 million on a pricing of $11. Ipo proceeds will be used for working capital.

SAC PEI CB will own 32% of MEDH post-ipo.

**A rather lame lock-up agreement here. Approximately 12-14 million shares will not be covered by any lock-up agreements post-ipo meaning they can be sold at any time. Only 22.5 million shares of the 42 million non-floated will be beholden to the 180 day lock-up agreement.

From the prospectus:

'We are a leading provider of integrated clinical documentation solutions for the U.S. healthcare system.'

MEDH's systems convert physicians' dictation of patient ineractions into an electronic record.

Solutions are a combination of voice capture and transmission, automated speech recognition, or ASR, medical transcription and editing, workflow automation, and document management and distribution.

MEDH is the largest provider of clinical documentation solutions based on the physician narrative in the US. 3.4 billion lines of clinical documentation processed annually. MEDH is actually a combination of three separate companies, CBay, MedQuist and Spheris.

***Not all of MEDH's transcription is done automated. Approximately 42% is transcribe offshore by 14,000 individuals. 67% is from automated speech recognition software. So we've a 2/3 tech company here and a 1/3 outsourcing transcription operation. MEDH has done a nice job of increasing the technology/automated percentage annually.

Customers include 2,400 hospitals clinics and physician practices throughout the US, including 40% of hospitals with more than 500 beds. Average tenure of top 50 customers is 5 years with 98% of all revenues being recurring.

Sector - Accurate and timely clinical documentation has become a critical requirement of the growing U.S. healthcare system. Medicare, Medicaid, and insurance companies demand extensive patient care documentation. The 2009 Health Information Technology for Economic and Clinical Health Act, includes numerous incentives to promote the adoption and meaningful use of electronic health records, or EHRs, across the healthcare industry MEDH believes these drivers will fuel growth going forward. MEDH believes the medical transcription sector will grow 8% annually over the next 4 years. MEDH believes outsourcing of medical transcription is just 33% of the overall market.

Total current outsourced transcription end market is $1.7 billion annually. MEDH is the largest provider, based on 2010 revenues they appear to have an approximately 25% market share. Pretty impressive.


Debt is the issue here. Debt post-ipo will be $295 million. Note that MEDH will have $64 million of cash on the balance sheet. They seem intent on using this cash to acquire however so expect 1)an acquisition over the next 1-2 years and 2) that debt to remain on the books.

Gross margins improvement as MEDH shifts a higher percentage of transcriptions to all electronic.

2010 - $461 million in revenues, a pro forma drop of 10%. Revenue decrease is 100% due to the drop in Spheris, whose assets MEDH purchased in 2010. Actual revenues increased however Spheris revenues declined significantly in 2010. Gross margins of 37%, operating margins of 9%. The kicker here is the debt. Sort of a chicken and egg issue here as without the two large acquisitions, MEDH's revenues stream would be relatively small. With the acquisitions, you've a sector leader with $461 million in annual revenues saddled with debt.

Debt servicing looks to eat up 75% of operating profits. Too much, too much, too much. MEDH has extensive tax loss carryforwards, so a nil tax rate in 2010. Net margins of 2 1/4%. EPS(pro forma) of $0.20.

2011 - Look for margins to continue to improve. MEDH expects to have approximately $20 million in debt maturing as well as continued tax loss carryforwards. Revenues should increase as MEDH digests the Spheris acquisition. 10% puts MEDH at $500 million, right where the combined entities were in 2009. Gross margins of 39%, operating margins of 11%. Debt servicing still looks to eat up 55% of operating profits in 2011. Net margins of 4.5%, EPS of $0.44. On a pricing of $11, MEDH would trade 25 X's 2011 estimates.

Conclusion - Different medical services niche, but this deal reminds me quite a bit of Emdeon(EM). Dominant sector leaders with quite bit of debt. If you look at the financials, these two match up quite well on growth, sector leadership and even debt servicing ratio. EM trades about 15 X's 2011 estimates and has really been lackluster since ipo. MEDH does have potential for better bottom line growth imo as they continue to shift from outsourcing transcriptions to automation. However, the debt should cap the upside here for quite awhile. Neutral on the deal, sector leader coming public valued about right.

February 11, 2011, 8:39 am

KMI - Kinder Morgan

KMI - Kinder Morgan

KMI - Kinder Morgan plans on offering 92 million shares at a range of $26-$29. Insiders will be selling all shares in the deal. Goldman Sachs and Barclays are leading the deal, BofA Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Wells Fargo, Madison Williams, Morgan Keegan, Raymond James, RBC and Simmons co-managing. Post-ipo KMI will have 707 million shares outstanding for a market cap of $19.443 billion on a pricing of $27.50. KMI will receive no proceeds from the ipo.

Richard Kinder and 4 investment funds took KMI private in 2007 for approximately $15 billion. Post-ipo Richard Kinder will own 30% of KMI, Goldman Sachs 20%.

From the prospectus:

'We own the general partner and approximately 11% of the limited partner interests of Kinder Morgan Energy Partners, L.P., referred to in this prospectus as the "Partnership" or "KMP."

An outsized version of recent ipo Targa Resources (TRGP). Difference other than size is that KMI was public for a number of years before going private in 2007 at over $108 a share (approximately $15 billion valuation).

KMI's main asset is an 11% interest in publicly traded KMP as well as the General Partner and incentive distribution rights of KMP. Note that KMI is not a master limited partnership, however their (nearly) only business is their stake in the master limited partnership KMP.

In addition KMI owns a 20% interest in NGPL PipeCo. NGPL is an interstate natural gas pipeline and storage system operated by KMI.

95% of revenues are derived from KMP, 5% from NGPL.

KMP - Owns 8,400 miles of refined petroleum product pipelines in the United States that deliver gasoline, diesel fuel, jet fuel and natural gas liquids, as well as 15,000 miles of natural gas pipelines and gas storage facilities. Also owns 1,400 miles of U.S. carbon dioxide pipelines, stakes in eight West Texas oil fields, 120 fuel terminals and 2,500 miles of pipeline in Canada.

KMP has grown distributions at a 40% compound annual growth rates since 1996.

In the US, KMP is:

* the largest independent transporter of petroleum products;

* the second largest transporter of natural gas;

*the largest provider of contracted natural gas treating services;

*the largest transporter of CO2;

*the second largest crude oil producer in Texas;

*the largest independent liquids terminal operator;

Distributions - KMI plans on paying shareholders $0.29 per quarter. At an annualized $1.16, KMI would yield 4.2% on a pricing of $27.50. Normally I prefer to see a 5%+ yield n the General Partnership deals, however recent TRGP ipo'd right at 5% and has appreciated to a yield of just 3.5%. KMI's underlying asset of KMP is one of the most successful MLP's in the history of the market, much stronger in every aspect than TRGP's NGLS.

In 2011, KMI expects to receive $1.3 billion in distributions from KMP. In 2010 KMP distributed $4.40 per common unit for the full year.

KMI's interests in KMP:

1 - The General Partner of KMP, include all incentive distribution rights.

2 - 21.7 million units, 7% limited partner interest.

3 - 12.1 million i-units, representing an addition 4% limited partner interest. i-units receive distributions in additional i-units instead of cash.

Growth - KMP has shown an ability for organic and acquired growth over the past 15 years. As KMP continues to grow yield, KMI receives more money quarterly.


$200 million in cash but a lot of debt here at $3.1 billion. I would imagine a portion of this debt was taken on through the going private transaction in 2007. Not thrilled with the debt levels here for an operation that, for the most part, just holds interests in KMP. In contrast, recent ipo TRGP had a pretty clean balance sheet.

Bulk of projected revenues are coming from KMP's General Partner. 86% of projected revenues are a result of KMP's General Partner/Incentive Distribution Rights.

2011 Projections - KMI is projecting $1.363 billion in total distributions from KMP and NGPL. After taxes and interest they are projecting exactly the $1.16 available for distribution in 2011.

Conclusion - Deal will work in range due to the name brand of Kinder. Kinder stocks – KMP, KMR, and KMI (before going private) have made investors a massive amount of money over the past 15 years or so. Really, home run stocks! However, I do not love the debt as a chunk of it was placed there to fund a “going private” deal.

Bottom line is pretty simple: The strong brand name in the MLP space ipo'ing here yielding 4.2% make this a recommend.

February 8, 2011, 7:49 am

IFT - Imperial Holdings

IFT - Imperial Holdings

IFT - Imperial Holdings plans on offering 19.2 million shares at a range of $14-$16. FBR, JMP and Wunderlich are leading the deal. Post-ipo IFT will have 27.3 million total shares outstanding for a market cap of $410 million on a pricing of $15. 2/3's of the ipo proceeds will be used to support IFT's finance transactions, with 10% to support IFT's settlement transactions.

Management and directors will own the non-floated shares.

IFT will not pay a dividend.

From the prospectus:

'We are a specialty finance company founded in December 2006 with a focus on providing premium financing for individual life insurance policies issued by insurance companies generally rated “A+” or better by Standard & Poor’s or “A” or better by A.M. Best Company and purchasing structured settlements backed by annuities issued by insurance companies or their affiliates generally rated “A1” or better by Moody’s Investors Services or “A−” or better by Standard & Poor’s.'

IFT finances life insurance premiums and also purchases structured settlements.

Revenues are earned from interest charged on financing loans and fees affiliated with those loans.

IFT historically funded their business by floating debt. Since 2007, the cost of debt financing has risen dramatically as lending rates and requirements such as collateral have increased.

IFT's financing costs in 2010 were 31.1% per annum of the principal balance of loans compared to 14.5% per annum in 2007. ***Result of these increased costs is that IFT has lost money on the bottom line in each of 2008, 2009 and 2010. Going forward IFT plans on using ipo proceeds to fund future financing transactions, lower the cost of capital and increasing the spreads.

IFT offers financing to individual life insurance premium holders allowing policy holder to retain coverage and miss scheduled payments for a period of time. Average principal balance is $213,000. Loans are approximately 2 years in duration and collateralized by the underlying policy. Individual receiving loan is not required to make any payments during the term of the loan. Average loan interest rate past two years has been 11%. At end of term either payment is made in full or default occurs and IFT takes control of the policy. IFT is generally required by lenders to insure policies upon lending and collects the insurance in case of default. This of course assists in increasing the cost of capital to that 31% annually.

Cost to IFT is 31% to finance loans with an average interest rate of 11%. IFT charges origination and agency fees as well, which allowed them to make a profit pre-2008 when cost of capital was 14.5% annually. At double+ the cost of capital, IFT needed to come up with an alternative. This ipo is that alternative, giving them capital to fund on their own part of their life insurance loan program.

***what a racket this appears to be. For loans that matured during the first nine months of 2010, 97% defaulted. No wonder IFT's cost of obtaining financing for these loans is so high, the loans nearly universally default. I don't care how much money IFT is making(they are not making any money since 2007), I don't want to invest in this type of business which essentially is taking advantage of individuals in a desperate situation.

Going forward IFT does not plan on obtaining insurance, rather they will fund their own purchases and grab the life insurance policy when they individual defaults. IFT will look to either sell the policy or hold it for maturity. This ipo is allowing them to change their business plan from one of financing life insurance loans, to a self-funded lender.

Structured settlements - 2nd segment, IFT purchases structured settlements at a discount and flips them and/or finances them through third parties. 2010 purchases were at a 19% discount to settlement. IFT generally resells the majority of their purchases and in 2010 the average sell price to discount was 9.1%. IFT does not generate a full 10% profit as they market heavily on tv, radio, print and internet to locate potential structured settlement sellers.

Bulk of revenues historically has been from IFT's life insurance loan segment.


$5 per share in net cash post-ipo. As noted above this cash will be used to alter the business model to self-funding loans.

2010 - $76 million in revenues, a decline from 2009's $96 million. IFT has not been profitable since 2007, losing more annually since. Losses in 2010 of $0.59.

Conclusion - Distate for both the line of business and the hefty losses in 2008, 2009 and 2010. Business model going forward will be self-funding short term life insurance loans with nearly universal default rates. IFT plans on holding a portion of these defaulted loans, making payments on them until the defaultee expires....then IFT cashes in. No interest.

February 2, 2011, 11:32 am

EPOC - Epocrates

EPOC - Epocrates

EPOC - Epocrates plans on offering 6.2 million shares(assuming overs) at a range of $14-$16. Insiders will be selling 2.6 million shares in the deal. JP Morgan and Piper Jaffray are leading the deal, William Blair and JMP co-managing. Post-ipo EPOC will have 22.3 million shares outstanding for a market cap of $335 million on a pricing of $15. Over 1/2 the ipo proceeds will be going to insiders, the remainder for general corporate purposes.

Goldman Sachs will own 12% of EPOC, Sprout Capital 12%, and Interwest Partners 8%.

From the prospectus:

'Epocrates is a leading provider of mobile drug reference tools to healthcare professionals and interactive services to the healthcare industry.'

Proprietary drug content on mobile devices. One of the original mobile apps, originally for the Palm back in 1998. EPOC was one of the initial iPhone 3rd party apps as well. EPOC was one of five app providers highlighted by Steve Jobs when Apple unveiled the iTunes App Store in a March 2008 briefing. The iPhone has been a nice revenue growth driver for EPOC.

Healthcare professionals are able to access information such as dosing, drug/drug interactions, pricing and insurance coverage for thousands of brand, generic and over-the-counter drugs.

Physicians and healthcare professionals refer to EPOC's content numerous times throughout the day for quick access to drug and clinical information.

Products used on mobile devices at point of care. User network consists over one+ million healthcare professionals including 45% of US physicians and 150,000 nurses. EPOC has worked with all of the top 20 global pharmaceutical companies. EPOC works with the pharmas to act as a rep of the company via their mobile data and content. Pharmas provide information to EPOC as a means to 'get in front' of physicians electronically.

EPOC is compatible with all US mobile platforms including Apple, Android, Blackberry and Palm.

20% of revenues derived through $99-$199 annual subscriptions to EPOC's drug and clinical reference tools.

***60 percent of revenues comes from drug manufacturers, who pay EPOC to supplement information on each drug with patient literature and contact information, so that doctors can contact manufacturers to request samples or ask questions. Insurance companies also pay EPOC to list covered drugs with their content. EPOC derives revenues from users and information providers alike, pretty good business model.

***According to EPOC's own survey of 2,800 physicians, 50%+ reported avoiding one or more medical errors every week. 40% reported saving more than 20 minutes per day. If these stats are truly representative of EPOC's customer base as a whole, we've a product here that creates efficiencies and saves time.

Growth - EPOC's growth initiative is to help doctors take whole practices digital. EPOC wants a piece of the projected hefty Federal incentives to shift patient data from paper to all electronic. This would be a whole new segment for EPOC and is not expected to contribute to revenues in the near term. Patient electronics segment is anticipated to launch in the first half of 2011.

In 11/10 EPOC acquired an Apple focused App store, Modality, for $14 million. EPOC plans on utilizing Modality to create an Apple platform based application for their planned employee health records initiative.

Competitors include WBMD and UpToDate inc...


$3 per share in cash post-ipo.

Solid cash flows over the past 4 years, better than GAAP EPS. EPOC has been cash flow positive since 2003.

A nice positive here is the lack of dependence on Medicare and Medicaid for revenues.

Revenues entirely derived in the US. 9% of users are paid, the remainder use EPOC's free service.

***EPOC has ramped up expenses heading into their spring '11 launch of their digital patient records initiative. To date they've derived no revenues from this initiative, the added expenses have negatively impacted the bottom line. Operating expense ratio the first nine months of 2009 were 54%, jumping to 65% the first nine months of 2010. Stock compensation expenses were roughly the same through both periods, the culprit here is definitely this new growth initiative. It will be well after ipo until it is known whether or not these expenses will pay off. EPOC expects margins increase to historical norms in the back half of 2011.

Quarterly revenues have been flat the past 4 quarters. It appears there is a sound reason for EPOC launching their growth initiatives. Their strong iPhone fueled growth in 2008 and 2009 has plateaued on them.

4th quarter is historically the strongest.

2010 - $102 million in top-line revenues, a 12% increase over 2009. 69% gross margins. As noted above, a notable increase in operating expense ratio, not ideal heading into ipo. 5.3% operating margins. 3.4% net margins, EPS of $0.15.

2011 - EPOC hopes to see margins return to 2009 levels in the back half of 2011. 2009 operating margins were 16%, compared to 2010's 5.3%. Assuming revenues begin to accrue from the electronic records initiative, EPOC should be able to grow revenues 15%-20% in 2011 to $120 million. Operating margins of 10%, net margins of 6.5%. EPS of $0.35. On a pricing of $15, EPOC would trade 43 X's 2011 estimates.

Conclusion - Solid niche leader coming public after their fast growth stage. This is a deal that most likely would have come public(and done quite well) in 2008 or early 2009 had the ipo window been far enough open. Instead EPOC is coming public in 2010 in a bit of stagnant top line and deteriorating bottom line period. Both may be temporary if EPOC's electronic patient records segment takes off as EPOC hopes. That is the key to this ipo here. If EPOC can lay on revenue and margin improvement the 2nd half of 2011, EPOC will do quite well mid-term plus. Until then, a holding pattern. Market cap in range is quite reasonable here at $335 million, neutral short term...mid-term+ will depend on the success of the electronic records initiative.

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