Shares of Magellan Health Services Inc., trading above $8 as recently as this spring, have been mired in the 20-cent range. The company's lenders could demand accelerated payments as soon as January, likely forcing the Columbia mental-health company into bankruptcy.
But on his second day as Magellan's new chief executive officer, Steven J. Shulman exuded optimism.
"This is not a troubled company," he said firmly.
The problem, he said, is fairly simple. "The reason it's a 20-cent stock, in my opinion, is that it has so much debt. There's nothing left for the investors."
With several large acquisitions about five years ago, Magellan roughly tripled in size, growing to the point that it covered mental health services for 70 million people. To finance its purchases, however, it built up a billion dollars in debt.
Now, said Thomas H. Shinkle, a high-yield debt analyst at Imperial Capital LLC in Beverly Hills, Calif., Magellan has cash flow from operations of $140 million to $180 million a year, but $90 million of that goes for debt service. The problem became acute over the past year, as members used more mental-health services, further stressing Magellan's cash flow.
"We need to restructure or reduce the debt," Shulman said yesterday, "and use the working capital to reinvest in the company." Investments in such areas as computer systems, he said, could bring a return in improved efficiency and, therefore, profitability.
Magellan is paid by HMOs, employers and governments to cover mental-health services. In turn, it contracts with therapists and hospitals to provide the care, and pays claims.
A question of money
"The company has never really integrated the systems from the companies it bought," said Charles Titterton, an analyst for Standard & Poor's. "The question is: Do they have the money to do that?"
Shulman said he could not comment on talks with lenders, but added that in weighing whether to come to Magellan, "I have done my due diligence on the company side and on the bondholder side."
Shinkle said some of the debt could be exchanged for equity in the company, cutting debt service payments by as much as $56 million to $58 million.
The debt-holders see restructuring as an attractive alternative to bankruptcy, the analysts said.
Lenders are, in effect, saying, "If we pull the plug we may wind up with a disorderly liquidation and lose most of our money," Titterton said. "I would not be at all surprised if the banks continue to hang in there with Magellan a while longer."
Todd Richter, an analyst for Banc of America Securities, said, "The company's got an awful lot of problems. One guy, by himself, can't turn it around."
But the arrival of Shulman is probably a sign that lenders will give the company time, analysts said.
Shulman was CEO of Prudential HealthCare Inc., and before that, founded and led Value Behavioral Health, a company similar to Magellan.
"I'm going to guess, given the dire position of the company, that the banks had a say in this," said Premila Peters, a high-yield analyst at KDP Investment Advisors in Montpelier, Vt.
'Great strategist'
Robert Petricelli, who worked with Shulman at Value Behavioral and at Cigna HealthCare, said Shulman is "a great strategist" and "a good salesperson." Petricelli is CEO of Evolution Health, a Connecticut company that manages employee benefit accounts.
Shulman said he would look to reduce the company's costs further.
However, he said he has no plan to lay off employees - the company has about 900 workers in Columbia and nearly 6,000 nationally - or for aggressive cutting of rates to therapists.
Restructuring the debt is the key to a turnaround, he said.
"There's a cloud over this company on the Street and with our customers," he said. "The first 15 minutes of every presentation are spent dealing with questions about financial stability."
He declined to specify a time frame for debt restructuring, beyond saying it would be "expeditious." But, once that is done, he said, progress should be clear: "People don't understand how financially sound this company is."