Tender Offer / Liquidation: Upside TBD (at $16.91)
Correction: initially this pitch was posted with a mistake in upside calculations, this has now been corrected (the SoTP table below has been updated). Upside decreased from 88% to 37%. Apologies for the error.
This situation has two potential event-driven angles, one short-term and one longer-term.
Medical Facilities Corporation (MFC) operates specialty hospitals in the US. Earlier this month, the company sold one of the hospitals for $46m. Management will likely return the proceeds to shareholders via tender offer at a premium to the current price. The sale press release included the following text (substantial issuer bid is a Canadian equivalent of a tender offer):
The Corporation is currently evaluating various alternatives for the majority of the anticipated net proceeds, including repurchasing shares under the Corporation’s normal course issuer bid, making a substantial issuer bid, and/or making distributions to shareholders.
This language is identical to the announcement following the sale of another MFC hospital a year ago. That divestment closed in November 2024, and just two months later, the company launched a tender for 22% of outstanding shares. Given this pattern, there is a high probability that the recent proceeds will be deployed to repurchase 10%+ of the outstanding shares.
The previous tender cleared at the upper-end of the C$16.50-C$18.00/share range (which was already increased from the initial C$15.50-C$17.00/share). And even at this price level the offer ended up undersubscribed with only 75% of the C$81m targeted amount filled.
One year has passed since then and a lot might have changed in regards to investor sentiment to MFC’s stock, especially after ‘The Great Healthcare Plan’. But MFC is now a leaner, higher-quality entity following the divestment of all non-core assets and its lowest-performing hospitals. The remaining assets continue to perform stably. The stocks of other hospital/clinic operators have on average moved upwards over the last year.
The fact that the previous tender a year ago failed to fully clear even at C$18/share, and the growing speculation of a full wind-down / sale of the company set a high floor for the capital return.
The Long-Term Angle: Full Sale or Liquidation
This setup centers on a full sale or wind-up of the company.
MFC has already divested all non-core assets and two of its four core hospitals. The company is now left with 51% stakes in just two facilities. At this size, MFC is clearly sub-scale and burdened by disproportionate public company overhead. While a formal wind-up has not been announced, the aggressive reduction in share count (down 40% since 2021) and the pattern of asset sales suggest a strategic liquidation might be underway. The activist has also been pushing for further sales and repurchases, and management has shown a willingness to follow the activist’s roadmap.
Let’s quickly review how we got to today.
MFC used to operate four larger hospitals, primarily focused on orthopedic and spine procedures. The company held 51-64% stake in each, while physicians practicing at each facility held the minority interest. For more background on the business you can refer to this pitch by Trident Opportunities from 2023.
Between 2018 and 2021, the company attempted to expand into the ambulatory surgery center (ASC) space, and acquired a number of small ASC facilities. This venture failed, resulting in a sizeable write-off in 2022. That same year, activist Converium Capital, alongside other shareholders, forced management to change its strategy.
In September 2022, management caved to activists demands:
In recent months, MFC has engaged in constructive discussions with Converium Capital Inc. (“Converium”), a shareholder of the Company, and other shareholders to gather feedback on the strategic direction of the Company. The announcement today reflects the results of these productive discussions and the Board’s thorough evaluation of available options. As part of this change in corporate strategy, MFC plans to suspend acquisitions, divest its non-core assets, pursue overhead cost reductions, and evaluate and implement strategies to return capital to its shareholders, including the commencement of a substantial issuer bid, as described below.
After this, the chairman, CEO, COO and CDO were replaced. The company halted its ASC expansion and gradually divested this non-core business. MFC also immediately launched a tender offer for 12% of outstanding shares and began an aggressive buyback program. The corporate level debt was fully repaid, leaving only subsidiary level debt on the balance sheet.
Most importantly, the company began divesting its core specialty hospitals. In 2024, it sold Black Hills Surgical Hospital (BHSH) for US$105m (9.15x TTM EBIT). Converium Capital responded with congratulations, but urged management to pursue the sale of the remaining facilities and continue aggressive share repurchases. Another tender for 21-23% of shares followed shortly after.
This month, the company closed the sale of another specialty hospital, Oklahoma Spine Hospital (OSH), for US$46m, along with the last remaining ASC facility for US$1.5m. OSH was sold at 7.8x TTM EBIT. It sort of looks like the company is gradually winding down.
The two remaining facilities are:
- Sioux Falls Specialty Hospital (SFSH): This is MFC’s crown jewel, located in Sioux Falls, South Dakota. It’s a multi-specialty hospital with a procedure roster spanning orthopedics, urology, ear, nose and throat, neurosurgery, plastic surgery, etc. The facility includes 76,000 sq. ft., 15 operating rooms, 1 procedure room, and 33 overnight beds.
- Arkansas Surgical Hospital (ASH): Located in Little Rock, Arkansas. The facility specializes in orthopedic and spine surgeries, and includes 126,000 sq. ft., 13 operating rooms, 2 procedure rooms, and 41 overnight beds.
These remaining assets are higher quality than the ones already sold. They are larger and more profitable, generating 20%+ operating margins at the facility level. That is partly due to being located in small towns with limited competition. Management noted that this positioning allows the company to negotiate more favorable reimbursement rates with managed care plans than would be achievable in urban markets. In comparison, the already sold OSH operated in a much more competitive metropolitan market (Oklahoma City) with facility-level margins of only 5%-10%. BHSH was operating at mid-teens margins.
The facility-level financials of the two remaining hospitals are shown below. Both assets seem to be pretty well-run, stable and cash-generative businesses with low maintenance capex (1-2% of facility revenues). Organic growth is minimal and annual results fluctuate mostly depending on procedure and payor mix (private versus Medicare, etc.).
Note: The 2022 performance decline was largely an accounting issue tied to the PPP stimulus program. The SBA placed loan forgiveness applications under review, forcing the company to reverse income it had recognized in the prior year. Once the SBA completed its review in 2024, that income was booked, creating a corresponding earnings boost for 2024. Besides that, ASH’s strong 2023 growth was driven by an operating room expansion from 11 to 13 rooms, completed in 2021.
How much could the two remaining facilities fetch in a sale? I think at least 9x EBIT.
- MFC’s hospital in Oklahoma City (urban, more intense competitive environment) was just sold for 7.8x EBIT. A year ago, Black Hills hospital got divested at 9.15x.
- The closest peer is Surgery Partners (SGRY). It is a much larger operator of surgical facilities with $2bn market cap and a diversified portfolio of 200 locations. It trades at around 15x EBIT and is much more levered. Just half a year ago, the largest shareholder (Bain Capital, 40% stake) intended to take SGRY private at a 70% premium to today’s prices, but the offer was rejected by the special committee. SGRY has been rolling up tiny facilities (<$10m deals) at 8x adj. EBITDA.
- Acute care hospital operators (not a direct comps to MFC) trade at around 10x-20x EBIT multiples.
Here’s how MFC valuation stacks up, assuming 9.5x EBIT multiple for Sioux Falls Specialty Hospital (SFSH) and 9x for Arkansas Surgical (ASH):
Note: the company is listed in Canada, but reports financials in US dollars.
In a piecemeal sale and/or a liquidation, you might need to throw in another US$40m for taxes and transaction costs, and maybe a further US$30m for wind-down costs. That would reduce the potential upside to 6%.
I will end my rambling with a note that the sale of two remaining facilities is a pure speculation at this point – a speculation based on management’s actions so far. The company might equally well remain public for many more years. Management ownership is minimal. It is also unclear if the activist, Converium Capital, still has position in MFC. Its stake was never disclosed and was likely small. Also keep in mind, I do not know the first thing about the US healthcare industry or how changing regulations might impact the financial performance or marketability of MFC’s facilities.
Is the math above correct? If sum of the parts is $311 million and shares outstanding is 18.3 million, isn’t that $16.99 per share in USD, not $23.13?
What am I missing? There does appear to be some upside here, but not to the degree stated in the pitch.
Thanks for spotting. This has now been corrected. There was a double exchange conversion in my calcs.
Hi DT,
“In a piecemeal sale and/or a liquidation, you might need to throw in another US$40m for taxes and transaction costs, and maybe a further US$30m for wind-down costs. That would reduce the potential upside to 6%.”
Would you please show how you came up with these taxes and transaction cost estimates? I think you have a lot of experience with liquidations and associated costs so it would be good to get that insight.
Also, would you please discuss the tax treatment when participating in tenders for a Canadian company e.g., are proceeds treated as a dividend and therefore subject to Canadian withholding tax etc. ?
For transaction costs and taxes, I have used figures that are in line with MFC’s Black Hills Surgical Hospital sale in 2024/2025. Then the company incurred $3.3m in transaction costs and $14.4m in taxes on $105m in gross consideration. Since the tax basis for SFSH and ASH is unknown, I applied the same tax proportion to the estimated gross proceeds. This should be directionally correct and does not materially affect the ultimate outcome. It sums up to $40m.
As for the liquidation expenses, it’s simply a guesstimate, which feels “conservative enough” for this case. The company has basically no debt or leases at the corporate level and the corporate overhead run-rate stands at around $7.3m annually. I suspect that other assets/liabilities at the corporate level are also minimal.
Regarding the tender, I would expect the announcement itself the push the share price higher (if the company decides to return cash via tender). From there, it will depend on the tender range and where the stock ultimately settles. At the time of DR’s last tender the paid-up capital stood C$10.98/share, so if it remaining at the same level, then around 35-40% of the capital return would be treated as deemed dividend and taxed accordingly (meaning participation in the tender would be viable only to those not subject to Canadian withholding taxes). Before we know further details and where the shares settle post announcement, it is hard to tell anything more.
DR reported Q4 results. On a positive side, both of the remaining facilities continue to perform well, with 2025 Income from Operations ($19.6m for ASH and $34.6m for SFSH) slightly above the figures I have used in write-up calculations. So all good on that front.
Nothing was said about the pending capital return, aside from the usual boilerplate statements. Management mentioned the final the tax liability on OSH sale will be communicated only with Q1 results. I do not think this means that capital return also be delayed till the release of next quarter’s results in May,and hope we will hear about it earlier.
From the call:
Management has been very candid and effective all these years and I don’t see anything weird around the tax liability. I am surprised at the stock reaction and I have no doubt that a capital return will be announced.
Q1 numbers are in. Net proceeds from the OSH sale landed at just under $36m, leaving the corporate-level cash balance at $78.1m at the end of the quarter.
We’re still in the dark regarding the potential capital return. Management says they’re still working on the plan, which is good, but I definitely expected an announcement by this point. They did repurchase 318k shares during the quarter.
The two remaining facilities are performing well. Service revenue for these assets grew 10.8% YoY in Q1. TTM EBIT now sits at $36m for SFSH and $20.3m for ASH, up from $33m and $19m at the time of the write-up.
Following the sale of Black Hills Surgical Hospital in mid-November 2024, Medical Facilities executed the entire Substantial Issuer Bid Dutch auction process in just under two months from announcement to completion and I wonder why things are going so slowly now. Perhaps the recent divestitures have fundamentally altered the company’s investment thesis. By stripping away these major cash-generating assets, management has not only generated a massive corporate cash reserve but has also radically streamlined what was historically a highly complex, multi-facility corporate structure.
Unless some announcement comes out shorty, the prolonged silence and lack of granular guidance regarding the deployment of these new proceeds may suggest that the board is looking beyond a simple capital return. A cleaner corporate shell, paired with a significant balance sheet cushion and only two remaining core facilities, could make the company an attractive and easily digestible target for a take-private transaction or a strategic buyout.
Apparently the former Chief Financial Officer holds 221,344 options at the excercise price of C$17.98. These options expire November 21, 2026. Former CEO’s options (over 200k at C$17.24) expired worthless on May 1, 2026.
I wonder if CFO shares are any consideration in their decision?
On top of the ongoing daily buybacks, the company repurchased a massive 1m share block on May 29 at C$17.48/share. That is nearly 6% of shares outstanding. Whether management stops here remains to be seen, but the odds of another tender offer look a bit lower now. The stock already trades above the upper end of the previous offer range.
Q2 results are out. Although the stock is down 6% after earnings, operationally, there is little to complain about. The two remaining facilities continue to perform well, with combined service revenue growing 7.8% YoY and TTM EBIT at the same level as in the previous quarter ($36.0m for SFSH and $20.8m for ASH).
The less encouraging part is capital allocation. The company continues to provide little visibility on what it plans to do with the remaining $58m of excess cash. During the quarter, MFC repurchased 1.34m shares for $17.1m, the vast majority through the 1m-share block purchase in May. The current 1.81m share NCIB limit was then fully exhausted shortly after quarter-end.
Management continues to keep its options open:
“This strong liquidity position provides flexibility for us to continue supporting our hospitals while evaluating opportunities to return capital to shareholders in the most efficient manner.”
A large tender offer would have been the most obvious near-term catalyst following the OSH sale. Instead, management has so far chosen to deploy capital through the NCIB. Enough time has now passed for the board to evaluate avenues of capital return, and at this point I think it is more likely than not that we will not see another tender offer.
The stock is slightly below the quick pitch levels after accounting for the two dividends paid since then. Given the aggressive buybacks, stable earnings base and continued strategic optionality (the two remaining hospitals could be sold), the situation still seems interesting. Downside should remain reasonably well protected here at least for the next quarter.
My take is that they do not do a tender offer because they are looking for (perhaps already discussing with) potential buyers of the whole business and a good chunk of net cash may be an attractive sweetener.
As you also mentioned in your initial note, specialty surgical hospitals in the US with +20% EBIT margins and zero/small debt trade in the range of 8.5x to 11.5x EV. Assuming a flat Q3 and a good Q4 – which is the recurring pattern of the business -, they should conservatively end the year with an income of ~ 47mm. However, once we deduct the corporate costs, the combined income of the two hospitals will very likely be no less than 53mm. Applying a conservative multiple of 9 times, we would end up with 477mm, of which 51% – 243 -belong to the corporation (the two facilities should have zero debt at end of year).
If we add 30mm of corporate cash, we end up with a total value of U$ 273mm, equivalent to CAD 382 or 21.70 per share. We can discuss about some potential future liabilities, but at this price (16.20) I see a compelling margin of safety and a decent upside.