MedQuist Trading Close to Cash

Philips owns 70% of MedQuist (MEDQ.PK), a medical transcription company. Philips bought the company at $51; the stock now trades at $7. Philips announced in November 2007 that it was selling its stake, and MEDQ hired its own investment banker. Costa Brava and Newcastle each own more than 5% stakes, both at a cost of roughly $12. Newcastle got BOD representation in December 2007.

MEDQ has $161M net cash, or $4.25 per share. The company is EBITDA breakeven, if you add back the non-recurring expenses.

At $350M in revenues, MEDQ is the largest player in a $7B industry. The stock trades on the pink sheets due to lack of SEC filings. They finally filed these docs in early 2008 and are now current.

It doesn't much matter where the stock trades now since the company is for sale. This is an interesting spot to own the stock. Philips valued the company at $12 in November 2007. Costa Brava mini-tendered at $12.25. Newcastle owns it at $12.

Disclosure: Author has a long position in MEDQ.PK

Comments

[Eric Appell:]

MEDQ.PK filed its 10-Q last night.

Revs were down y/y ($84M vs. $89M), but up nicely q/q--probably due to seasonality. At $83M, still a nice number. I was expecting a slightly worse Q, but the improvement in GMs led to a pretty good Q (they are using more speech recognition software to improve productivity).

While EBITDA was slightly negative, if we add back the soon-to-be-non-recurri... legal/investigation expense of $6.3M, then EBITDA was +$3.3M. Not bad for a company that for several years didn't file 10-Q and had to give back to customers $60M. I am amazed that this company could go through the wringer that hard and emerge from the other end with most customers/revenues intact.

Cash was $153M and WC was $131M. 37.5M shares outstanding.

Bottom line: The company is on the auction block; there are two 13D filers (they own their shares at $12; stock's at $7), and a rumor that CBAY (a public competitor in India) is acquiring Philips' stake (more likely the entire company, since it doesn't make sense for them not to). Moreover, earlier this year, the CEO was quoted as saying that several strategic and financial buyers were interested in buying the company. This seems to add up to a low-risk/high-reward situation.

This stock is a buy; I am long.

2008 May 10 09:32 AM