Check the Pulse of Matria Healthcare Deal

Matria Healthcare (MATR) is a disease management company that manages diseases and high risk pregnancies for employers and managed care organizations through call centers staffed by RNs. Analysts estimate that MATR will earn $24 million on revenues of $370 million for 2008.

Inverness Medical Innovations (IMA) announced in late January that it had reached an agreement with MATR to acquire it for $6.50 cash and the issuance of $32.50 worth of Preferred convertible IMA shares and the assumption of $280 million of Matria debt. The proposed deal appears messy and complicated. Wall Street's reaction to it was underwhelming, as both IMA and MATR saw their shares decimated shortly after the announcement. IMA lost almost half its value while MATR saw its shares skid more than 40%.

Management on both sides claim that the share price declines were the result of investor confusion and that a combination provided opportunistic synergies. Matria Management offered a conference call to promote the IMA acquisition, but it fell woefully short of calming shareholders' uncertainty over the logic of it.

The acquisition is now in the process of regulatory approval, with the next step being MATR shareholders voting to back the deal. This phase could be a sticking point, as many shareholders seem to question the logic of it, especially in light of the fact there were other more qualified bidders interested.

In a S-4 filing by Inverness, it was disclosed that there were two other bidders as well as a financial backer involved in the bidding process. A Financial Times article dated 2/28/08 suggested that Walgreen (WAG) submitted an all-cash offer of $32 and that Healthways (HWAY) also expressed interest. The article also claimed that IMA was in the process of asking its lenders to restructure the deal to include more cash, but it was unlikely they would be successful due to the current weakness in the credit markets.

If the current deal between MATR and IMA starts to unravel, there could be hope for MATR shareholders, as both Walgreen and Healthways could be waiting on the sidelines to offer bids at significant premiums to the current share price. Check the pulse of the deal; it could quickly start to fade.

Disclosure: Author is long MATR.