Daddy Warbucks Makes it Happen: Unraveling HearUSA part 9

Judy Huch, The Audiology Condition
Hearing Health & Technology Matters
August 30, 2011

In 2002, HEARx completed the acquisition of a national hearing care company.  To properly reflect its new position in the industry, the merged entity was renamed HearUSA.  2011 HearUSA advertorial

In 2001 Siemens was a supplier–not an underwriter–of HEARx and Helix in the US and Canada.  Neither company was Siemens biggest customer, so it’s legitimate to ask why Siemens extended itself so far in arranging and supporting their merger into HearUSA in 2002.   Prior to the merger, Siemens’ biggest customer was Amplifon and it was reasonable for Siemens to ponder the consequences if Amplifon defected to another manufacturer.  Insiders say that Siemens considered this question and decided it was a good idea to acquire–or in this case, construct–another big customer to balance Amplifon. HEARx’s outstanding payables to Siemens may also have factored into the decision.

Accordingly, Siemens US President Paul Ericksson reportedly approached Helix to see if they would merge with HEARx.  One thing Siemens did not have on its mind was ownership.   Back then, Siemens bylaws did not allow it to own any part of its customers{{1}}[[1]]According to an industry insider, the bylaws were a response to severe financial repercussions Siemens  experienced in the 1980s when it purchased a  number of retail  outlets[[1]]  Bylaws or not, it doesn’t look as though Siemens wanted to be an owner anyway– it just wanted to guarantee expansion and control of its customer base, so it took on the task of orchestrating and underwriting the merger.  And let’s not forget that Siemens had the juice to make it happen.

Helix and HEARx liked the Siemens proposal, especially the money part (I’m just guessing).  Steps to structure the arrangement included creation of indirect subsidiaries of HEARx and funding of HEARx for acquisitions and transactions in 2001, as described in an SEC document:

  1.  October 3, 2001: HEARx Acquisition ULC{{2}}[[2]]Unlimited Liability Company[[2]] was formed in Nova Scotia Province to hold all outstanding common shares of HEARx Canada Inc. and exchange common stocks of HEARx for those of Helix.
  2.  November 7, 2001: A new holding company called HEARx Canada Inc. was incorporated in Canada, for the sole purpose of holding all outstanding Helix common shares that were not already owned by HEARx.
  3. December 7, 2001:  Siemens signed a credit agreement with HEARX, giving the latter a $51,875,000 secured credit line. According to the SEC document, this was in the form of Tranches (see below) that paid off HEARx’s payables to Siemens, redeemed outstanding HEARx stock, funded future acquisitions, funded general working capital, and paid off $6.7 million in Helix debts.

The money gets murky, not because there is anything suspicious, but because I get lost, but I keep revisiting and tweaking this post as I figure out a little bit more here and there.  As item 3 shows, Siemens funded a series of “tranches” to underwrite the complicated, 18-month merger.  Tranche is a French word that translates literally as “slice.” Tranches slice up the pie (in this case, Helix and future acquisitions/sales of HearUSA were assets or future assets) so that the deal’s capital was structured into loans/liens to be paid off sequentially with the most secured loans (“senior tranches”) paid off first. {{3}}[[3]]Go, as I did, to Investopedia.com & Wikipedia.com for a two-minute university on tranches[[3]] Here was the tranche set up as one person at the signing table recalls it – note that it is a bit different (and contains more money) than the 12/7/01 line of credit tranches described in item 3 above, or as recounted later in the 2004 10-K Annual Report filed by HearUSA{{4}}[[4]]In that report, the money is divided into more tranches and eventually sums to $55,375 mil:   A = $10.875 mil, 5-year term; Tranche B = $25 mil 5-year revolving line of credit; Trache C = $3 mil, 5 year term; Tranche D = $13 mil, 5 year term, Tranche E (added in 2003) – $3.5 mil 5 year term.[[4]]

Tranche A.  $20 million to Helix on total transactions of about $25M{{5}}[[5]]$14 mil shares of Helix at about $1.40/share[[5]] to address Helix payables and pay off Helix debt associated with office acquisition.

Tranche B. $ 50 million to HearUSA for future acquisitions–it was expected, apparently that the new company would follow in acquisition footsteps of Helix, rather than “from scratch” model of HEARx.

Tranche C.  A line of credit which enabled HearUSA to pay receivables & payables as they arose.  Siemens eventually converted Tranche C debt to an equity position in HearUSA as finances continued to unravel.

Apparently tranches make assets look more attractive. By paying off Helix’s debt, for instance, Tranche A created an asset for HearUSA out of a Helix debt. Tranches also secure the overall loan according to levels of risk (e.g., senior tranches are more secure than lines of credit such as tranche C).  Finally, they provide cash flow security to the investment. I’m not a financial or investment wizard, for sure, so I have to think about this through my slice-of-pie metaphor, and strongly urge those more savvy than myself to correct and improve my folksy analysis in the next paragraph.

Say I am Siemens and I have a big pie in front of me.  I have a moderate hunger level, so I’m sure I can eat one slice of pie, in this case Helix.  That’s going to cost me $20 million (Tranche A) but it will be worth it because I’ll actually ingest that piece and realize the full value ($20+ million in assets from the Helix offices that secure Tranche A).   I’m pretty sure I‘ll want a second slice of pie, which will be HearUSA after the merger (Tranche B).  That’s because I fully expect the second slice to be just as good as the first slice, since HearUSA is expected to follow the Helix acquisition model.  There’s more risk to me here – the next slice may not taste as good and it’s a lot more calories.  Tranche B costs me $50,000 with only “pie-in-the-sky” security (sorry!).  Finally, I’m not starving or desperate, but I don’t want anyone else getting any of my pie. Further, I want to keep it fresh and I want to maintain an option to eat more pies down the line.  So, I’m put up Tranche C to maintain/grow kitchen staff and equipment as needed to protect my pie and bake more.  If all goes well with my careful planning and investment, I can have a slice of pie every day and I will grow fat and happy.

This post ends fat and happy, with Helix and HEARx  wedded and blessed by their benefactor, Siemens.  All parties are looking forward to happy, fat times ahead as the honeymoon commences.  But what about those weird relatives?  What happens after the honeymoon?  Stay tuned.

photo courtesy of anyoneforcakescottland

 

 

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