Alliance Imaging Accepts Acquisition Offer

By JAMES S. GRANELLI

July 24, 1997 12 AM PT

TIMES STAFF WRITER

ANAHEIM —

Alliance Imaging Inc., the nation’s biggest mobile operator of magnetic resonance imaging machines, said Wednesday that it has agreed to be acquired by an affiliate of Apollo Management LP for $258 million.

The mostly cash acquisition would put Alliance in position to become the major buyer in the quickly consolidating industry of mobile MRI diagnostic units, said Terrence M. White, the company’s chief financial officer.

At the same time, the company reported big gains Wednesday in second-quarter revenue and net income, continuing its rebound from the early 1990s when huge losses gave the company a bleak future. Its quarterly earnings grew 41% to $2.4 million and its revenue rose 25% to $20.8 million.

Apollo is the $7-billion private buyout firm headed by Leon Black, once a top aide to junk-bond advocate Michael Milken at the now-defunct Drexel Burnham Lambert investment house.

Black, with operations in New York and Los Angeles, became a high-profile financier in the early 1990s when he bought the Executive Life junk-bond portfolio for $3 billion. Earlier this year, he joined with real estate developer Donald M. Koll to try to buy the Santa Anita Cos.

Last month, Black said Apollo would pay $200 million for a large chunk in the merger of two long-term care facilities operators, GranCare Inc. in Atlanta and Living Centers of America Inc. in Houston.

Apollo has been studying the mobile diagnostic industry for the last year, White said, and recently outbid Alliance for SMT Health Services Inc. in Wexford, Pa.

“Our strategy was to try to consolidate, and we were doing it little by little,” White said. “But as the bigger pieces become available, like SMT, our capital structure is not strong enough to outbid a company with the resources of Apollo. We decided we’d rather join them than lose out to them.”

Apollo brings access to big lenders in its highly leveraged operation. After picking up Alliance, it will have a $100-million bank loan ready for Alliance’s use in acquiring more companies and growing internally, White said.

Apollo’s Newport Investment LLC will pay $11 a share--all in cash to those who want it--to acquire 82% of Alliance. The average cash payout will be $10.43 a share, with the rest in stock, White said.

Apollo then plans to fold the smaller SMT into Alliance, further reducing the stake of Alliance shareholders to 10%.

Alliance’s chief executive, Richard N. Zehner, and its chief operating officer, Vincent Pino, will continue to manage the company from its Anaheim headquarters. No Alliance jobs are expected to be lost, White said.

That Apollo is keeping the management team together is a smart move, said William A. Relyea, an industry analyst at Josephthal, Lyon & Ross in New York.

“They are very fine operators,” Relyea said. “They’ve done an excellent job in terms of internal growth and marketing the mobile system. Their [profit] margins are fine; their growth has been great. They’ve done a superb job.”

Relyea and White both expect Apollo to sell Alliance, perhaps to the public, sometime in the future after it has built the company through acquisitions and internal growth and after industry consolidation has slowed.

Alliance already controls about one-sixth of the market for mobile MRI services. It has a fleet of about 90 units on wheels which make regular stops at hospitals and clinics in 36 states.

Only a few years ago, the company was immersed in red ink. It lost nearly $34 million in 1993 and ’94. Doctors were shying away from the use of the high-priced MRIs just as Alliance was buying more mobile machines.

But a confluence of factors--such as better MRI units and more outsourcing by hospitals and clinics--helped the company rebound and gave it time to restructure its debts.

“For the last year or so, they’ve been terrific with their operating results.” Relyea said, “and their second quarter was another terrific quarter.”

The company’s second-quarter earnings grew to $2.4 million, or 16 cents a share, from last year’s second-quarter profit of $1.7 million, or 13 cents a share. Quarterly revenue rose to $20.8 million this year from $16.6 million last year.

For the first six months, the company earned $5.4 million, or 41 cents a share, a 74% increase over $3.1 million, or 23 cents a share. Revenue rose 27% to $39.9 million for the period from $31.3 million.

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Alliance Imaging at a Glance

Headquarters: Anaheim

Chairman/president/CEO: Richard N. Zehner

Business: Radiology services to health-care providers, including MRI imaging and CT scans

Employees: 383

Status: Public

Exchange: Nasdaq SmallCap

Wednesday’s closing stock price: $10.38, down 13 cents.

Internet address: https://www.allianceimaging.com

Net Sales (millions)

1996 68.5