Deal focus: Allegro secures stake in Australia radiology business

Brought in by creditors to lead the restructuring and turnaround of I-Med Networks in 2011, Allegro Funds’ priorities included stabilizing the employee base. A large group of doctors had already splintered off to form PRP Diagnostic Imaging and more were agitating to do the same. There was general unhappiness with corporate ownership – I-Med was struggling under the weight of the debt used to buy it – and a desire among senior staff to take control of their own destinies.

Perth Radiologic Clinic (PRC) was ultimately sold off through a management buyout, but relations with the Allegro team were positive and lines of communication remained open. When PRC decided to bring in a financial partner earlier this year, Allegro entered a competitive process with a distinct advantage. It prevailed to secure what ranks as one of the firm’s largest-ever deals. The equity check for a significant minority stake is more than A$100 million ($69 million) – the fund involved has a corpus of A$290 million – and several LPs came in as co-investors.

“They have an organic ownership model: once a doctor retires others come in and acquire the equity. Our capital is facilitating some of that movement, but more importantly, they wanted a partner because they wanted help driving growth. All the doctor partners involved at board level still have their day jobs. They felt they needed someone with skin in the game to come in and take the business to new heights in terms of structure and management discipline,” says Chester Moynihan, a managing partner with Allegro. 

PRC claims to be the country’s fourth-biggest diagnostic imaging provider, offering a range of integrated services – x-rays, ultrasounds, CT scans, MRI scans, mammographs – from approximately 20 locations in Western Australia. There are more than 80 doctors, of which 45 are partners in the business. The ownership structure is not unlike that of a law or accounting firm, with each partner having an equal say on corporate matters.

A handful of doctors are elected to sit on the board and hold power of attorney for the practice, which can streamline the decision-making process. However, for certain decisions – in this instance, it was whether to sell the entire business or maintain doctor control and bring in a minority partner – consent from three-quarters of the entire shareholder base is required. This is not uncommon in professional services businesses of this nature and it can thwart private equity advances.

“There are corporate-led practices and doctor-led practices, and they are very distinct. Many groups are fiercely independent. You might have a few doctors who think it makes sense to do a deal, but more than 25% say no, so it doesn’t get done,” says Moynihan. “Corporate-led groups have acquired various practices, but if you asked a doctor-led group for its preference, most members would rather join with another doctor-led practice. They want to be partners, not employees.”

Dr. Martin Blake, the chairman of PRC, identified the preexisting relationship with Allegro and the co-investors – large superannuation funds from Australia and New Zealand – as key factors in the deal. Even though the private equity firm is participating in a minority context, it still needed alignment over a path to exit. Allegro has agreed to remain involved for at least four years, and Moynihan doesn’t dismiss the possibility of a financial institution with a long horizon, such as a superannuation fund, taking a direct interest at some point.

“They recognize we need to exit, and they have seen this can be beneficial,” he says. “We have free rein as to who we exit to, but anyone coming in will want to make sure the doctors are happy.”

This is the fourth investment from Allegro’s third fund. It follows a commitment to Questas Group, a local mining, construction and agricultural support services provider. While the main corpus is A$290 million, there is a sidecar vehicle of A$92 million for larger deals.

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• Topics
• Australasia
• Expansion
• Healthcare
• Allegro Funds
• Australia
• Growth capital