In the latest piece of M&A in small/mid-cap land, the diagnostic imaging company Capitol Health saw a friendly approach from competitor Integral Diagnostics (IDX) this week, sending shares up ~20% since Friday’s close to trade at 52-week highs. The deal would see CAJ shareholders receive ~0.13 IDX shares for each CAJ held, worth 32cps at yesterday’s close, CAJ making up ~37% of the register post-merger.
In contrast to CAJ, IDX shares have fallen slightly since the announcement. The deal values Capitol Health at 10x expected FY25 EV/EBITDA, a 15% premium to the average the stock has traded at over the last 5 years and slightly above where IDX has traded over the same period. We see this as reasonable given, 1) changes to MRI licencing, 2) potential cost and revenue synergies that can be realised, & 3) de-levering.
The government recently amended MRI licences with partial licences able to be fully bulk billed in 12 months. The combined group could deploy 17 MRIs at bulk billed rates from that date, and a further 22 machines from 1 July 2027. These additional machines will create both revenue and cost synergies across the group, above what can already be achieved by combining the two independents.
- We like this deal from a CAJ perspective, though risks in execution are obvious. We would be interested at a ~10% discount to implied pricing.
MM is neutral to bullish CAJ
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