Over the last several weeks I have analyzed the Stalking Horse bidding process in the context of the Spheris bankruptcy sale in some detail. Now its time to have some fun and guess: (i) who will bid for Spheris, (ii) how bondholders might affect the outcome, (iii) what other wild cards might affect the bidding process, and (iv) what the final price might be. I emphasize that these are my educated guesses based upon public information and my 20 some years of transactional experience (i.e., my guesses might be way off, but it's still fun).

From an operating perspective, Spheris appears to be financially sound if the $200 million in debt is removed through bankruptcy ($75 million in senior debt and $125 million in junior bondholder debt). Moreover, looking at what little financial information is publicly available, MedQuist's $75 million cash offer seems low. Accordingly, I anticipate that others will bid for Spheris.

For starters, I think we can eliminate any category of bidder who is not already in the transcription business, including a private equity group that does not already own a platform company in the business. I say that because of the relatively short bidding process, the inability to do in depth due diligence and the inherent risks associated with purchasing a bankrupt company. A purchase out of bankruptcy is just a tough way to enter any business. More importantly, a large company that is already in the business will be better able to realize savings by reducing Spheris' overhead and other administrative costs than someone not in the business, which makes Spheris more valuable to them.

Next, to state the obvious, we can eliminate any potential bidder that cannot raise at least $75 million in cash. There are probably more potential bidders able to raise $75 million than most people would expect. Many of the mid-sized MTSO's are owned or controlled by private equity groups that would have the ability to raise that kind of cash.

So that means that the most likely bidders are other MTSO's who can afford to make a meaningful topping bid. Of course, MedQuist has already bid, and I suspect is prepared to raise that bid if necessary. Moreover, the publicly available Spheris bankruptcy records reveal that representatives of both Nuance and Transcend have shown interest by attending several hearings. Nuance has also filed bid objections.

Therefore, I think the most likely bidders to make it to the auction are MedQuist, Nuance and Transcend. The dark horses are any other MTSO's owned or controlled by private equity groups, such as WebMedX and OSI Transcription among others.

The real wild card in this whole process will be the bondholders (who are owed $125 million). MedQuist, perhaps cleverly, bid $75 million cash which was enough to get the senior lender to go along with the deal. However, it leaves the bondholders with exactly zero and perhaps feeling a little miffed. Since they are the next creditors in line to get paid if there is a topping bid, they are interested, important and potentially powerful.

Not surprisingly, the bondholders have hired an investment banking firm to advise them in connection with this transaction. A possible scenario is for bondholders to join with a bidder and offer to convert their debt into equity in the new company. For example, a winning bidder could offer $75 million in cash plus offer the junior bondholders $50 million of equity in the new entity. By doing that, the bondholders receive significantly more than nothing and the buyer does not need to raise any more cash. It is even plausible that the bondholders could work with any or all of the bidders encouraging them to bid up the price.

Another wild card is the fact that M-Modal and Oracle have both filed motions with the bankruptcy court objecting to Spheris' ability to transfer certain software licenses to the successful bidder. The license agreements apparently are not assignable to a buyer absent the consent of the licensor. And that is for good reason, because neither M-Modal nor Oracle want their intellectual property to end up in the hands of a competitor or even a third party that they do not know. This is a bit confounding because M-Modal or Oracle could withdraw their objections depending upon who the winning bidder is. Arguably, they might be able to veto the apparent winner or even influence Spheris to disqualify a bidder because of the anticipated objections. In the end, the bankruptcy court might approve the transfers despite the objections, resulting in appeals and filings for injunctive relief. This is an area where a business transaction begins to look like litigation and is filled with uncertain outcomes. This is also the type of potential problem that could cause some potential bidders to decide to just take a pass...

The topping bids are due on April 8. As a result of that process, the qualified bidders will be identified. All of the qualified bidders will then have an opportunity to attend a final auction on April 13 where they can bid against each other in an open forum where the winning bidder will emerge subject to final court approval.

The last financial information that Spheris filed with the SEC showed annual revenues of approximately $160 million and EBITDA* of almost $25 million. Although a company with Spheris' market share might ordinarily sell for a premium, this seems unlikely because of the bankruptcy. At the same time, it is the second largest MTSO and (after eliminating the interest bearing debt) appears to be profitable. Accordingly, assuming the year old numbers are still accurate, my guess is that the price will be in the range of three to six times EBITDA ($75 million to $150 million).

There are a variety of factors that can affect what bidders are willing to pay. Most obviously, the revenue and EBITDA numbers could be higher or lower than those set forth above. Moreover, a company that has filed bankruptcy often starts to lose clients. As a result, bidders are probably making assumptions about what the "bottom" is. On the up side, buyers are trying to estimate overhead expense savings that can be realized by combining two companies. Finally, there are the wild cards and the "terms" of payment, such as cash, equity, converted equity and even assumed debt.

My guess is that a reasonable price (after the auction) will be around $125 million. The price could go higher if payment terms are more generous to the buyer (i.e. less cash).

If you would like to e-mail me your guess, please do so.

*EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization. It is a rough measure of cash flow often used in valuing businesses.