Virtual Radiologic Deal: More Small-Cap Buyouts Ahead?

As credit markets have begun to improve, a variety of small-cap companies have announced going-private transactions. Some of these companies actually went public just a few years ago, such as Double-Take Software (DBTK), which recently agreed to a $242 million buyout offer from private-equity firm Thoma Bravo.

Monday brought news of another interesting deal: Virtual Radiologic (VRAD). Like Double-Take, this company has cutting-edge technology and is focused on a growing market. Yet, as a small company, it has found it tough to get much respect from investors.

So Virtual Radiologic has agreed to a $294 million buyout from private-equity firm Providence Equity Partners. The deal comes to $17.25 per share, which is a 41.7% premium over the stock's 30-day moving average, and is expected to close in the third quarter.

A Rad Idea: Fast Answers for Doctors, Anywhere

Virtual Radiologic provides remote diagnostic image interpretation, known as teleradiology. Its sophisticated software transmits complex medical images, like CT scans and MRI scans, to members of its network of American Board of Radiology-certified radiologists, who rapidly interpret them and report back on the results to hospitals, clinics and imaging centers -- from nearly anywhere. This makes it possible to help customers during off-hours. What's more, the turnaround time for an emergency read can be as little as 20 minutes.

For the most part, Virtual Radiologic contracts directly with health-care providers (often on an exclusive basis). The result is that few of their transactions require Medicare or Medicaid payments.

All in all, Virtual Radiologic is benefiting from two major trends. First, there is likely to be strong growth for diagnostic imaging services. After all, the U.S. population is getting older, and diagnostic imaging can be extremely helpful in treating patients.

Next, the growth in new radiologists is expected to be sluggish. In fact, many will retire over the next decade.

A Chance to Focus on the Longer Term

Despite the positive trends, it can be tough for a company like Virtual Radiologic to trail-blaze a new business model. Its latest quarterly report showed that revenues had increased only 8% to $30.8 million. But for a private-equity operator, the short-term thinking that the markets encourage is not a problem. Being held privately will allow it to think longer-term, with a focus on the next couple of years -- and this should allow Virtual Radiologic to get more traction. In the meantime, the company is generating nice cash flows, which came to $7 million in the quarter.

The Virtual Radiologic deal looks to be just the beginning of small-cap buyouts. Private-equity firms are looking for growth deals, and there are many attractive companies out there that may be realizing they don't relish dealing with the high costs of being public, or the problems of getting traction with investors.