FONAR Corp (FONR)

I like special situations. They usually have higher degrees of certainty when answering:

• How much cash is there?
• When will I get it?
• How sure am I?

They tend to be a more stable, uncorrelated, and reliable source of returns. I like that given how I feel about the present market environment.

The following is not something you can put institutional amounts of capital into. But it’s more scalable than an odd-lot trade.

FONAR Corp (FONR)

On July 7, FONAR received a non-binding proposal from its CEO, Timothy R. Damadian, to acquire the outstanding shares of the company in a going-private transaction for $17.25 per share in cash — a ~13% premium to the current stock price.

FONAR makes MRI machines and receives fees to manage diagnostic imaging centers, but I’m only here to bet on the buyout proposal. If the proposal falls out, I’m taking the loss, so I don’t care what they do.

Thesis

My bet on this deal closing boils down to the following:

• The CEO — Damadian — owns over 99% of the Class C shares, which have 25 votes per share. That gives him a majority of the company’s total voting power.
• In his proposal to the Board of Directors, he basically gave them an ultimatum, stating he has no interest in voting for any alternative transaction.

So, the Board cannot look for a better (outside) offer because the CEO already promised to veto it. His offer is the only one on the table. Sucks if you’re a minority shareholder prior to this proposal. But, in my opinion, it skews the path toward the deal being accepted.

I should note, the fact Damadian has a majority of voting shares does not mean the deal automatically goes through. The Board technically has a fiduciary duty to do what’s best for all shareholders. That’s why they form special committees.

My guess is the deal gets rubber-stamped at a slightly higher price than $17.25 to make it look like the Board did their job in case of lawsuits.

Risks

The primary risk is obvious: the proposal is non-binding. Like browsing Netflix, you can click on something that looks interesting but you’re under no obligation to watch it. The CEO can withdraw his offer at any time, for any reason. It happens (see TTEC last week).

Likewise, shareholders outside of the acquiring group can vote down the deal. That's why an increase in the offering price seems more likely.

Another risk is that most deals break down because financing falls through. FONAR is profitable and has a strong balance sheet with $54M cash and equivalents against $55M in total liabilities — of which $39M is an operating lease and $8M is unearned revenue. I think a bank would consider that a low-risk candidate for financing.

Outlook

I expect a decision from the Board’s special committee within a couple months. If the deal is approved, it would likely close within a year.

This is not investment advice. Do your own work. I find the odds compelling and own some shares.

Disclaimer

I am not a licensed financial advisor. Nothing I say or do constitutes any sort of professional investment, legal, accounting, etc. advice. This site is my public research journal. It’s a place to share my work and improve my thinking. You should always do your own work, check your own facts, and make up your own damn mind. I am not liable or responsible for any decisions or adverse effects you experience if you make decisions or form opinions based on what I write.

Notes

FONAR Corp is the parent company which owns a subsidiary named Health Management Corporation of America (HMCA) — the primary source of income and growth for FONR.

In 2013, HMCA partnered with a group of outside investors to form Health Diagnostics Management (HDM), which is the company that manages the MRI scanning centers.

HDM has two classes of stock, A (non-controlling interest) and B (controlling interest).

HMCA owns the Class B stock, so FONAR consolidates HDM’s financials. FONAR owns ~71% and the outside investors, who own the Class A stock, own ~29%.

The consolidation of financials is why, if you look at the cash flow statement, you’ll see a ~$5.5M distribution per year to non-controlling interests.