Like so many romances, the impending $277 million marriage between Accuray Inc. (NSDQ:ARAY) and TomoTherapy Inc. (NSDQ:TOMO) began on the shores of the Mediterranean, in the beautiful city of Barcelona.
TomoTherapy CEO Fred Robertson and co-founder Thomas Rockwell Mackie were in a precarious position during their stay in Spanish coastal city during September 2010. While the men were technically there to attend the European Society for Therapeutic Radiology and Oncology’s conference, there was something else nagging at them.
TomoTherapy was in trouble. Despite its nearly $200 million in sales and a large installed base of its “ring gantry-based” cancer treatment platform, the company was well on its way to losing $30 million for the year — which would have been three in a row, with no break-even likely for the foreseeable future.
The board was anxious to have the company sell. Two years earlier, Avalon Portfolio LLC, a major TomoTherapy shareholder, threatened a proxy fight unless the company figured out a way to “monetize the technology.” The board agreed and the company hired BofA Merrill Lynch to provide investment banking services and find a suitor in late 2008.
But finding a buyer wasn’t easy. Over a two-year span, TomoTherapy saw several potential mergers fall through with at least four potential acquirers, including an un-named private equity house.
Enter Accuray CEO Euan Thomson, who was also at the ESTRO conference last year. Thomson was familiar with TomoTherapy and its executives, having come into frequent contact with them at industry conferences. From time to time the men even had thrown around some potential strategic business opportunities.
In Barcelona, the conversations turned from the anecdotal to the more serious. Mackie and Robertson wanted to gauge Accuray’s interest in investing in Compact Particle Acceleration Corp., in which TomoTherapy had an investment. As the conversation turned more serious, Robertson floated that a “possible broader strategic combination might be desirable” and the men agreed to talk further.
Over the next three months the talk evolved into negotiations, which ended in a March 2011 announcement of their proposed $277 million union. Accuray agreed to pay $4.80 per share in cash and stock, a nearly 31 percent premium over TOMO’s $3.67 closing price Friday, March 4.
New regulatory documents , released ahead of the merger (expected to close by the third quarter of 2011), show that the conditions under which TomoTherapy brokered the deal with Accuray may have led to a pretty sweet deal for Sunnyvale, Calif.-based ARAY. The radiosurgery device maker snapped up the larger company for a meager 0.66 percent multiple on TomoTherapy’s 2010 sales.
Accuray will immediately recoup more than half of the purchase price by assuming TomoTherapy’s cash reserves. As of Dec. 31, 2010, the company had $270 million in assets, including $152 million in cash and equivalents and $163 million in shareholder equity.
And TomoTherapy, which announced in February 2011 that it had shipped its 350th radiation therapy system into the market, will bring Accuray nearly $200 million in sales and the possibility of much more in service contracts for already-installed systems. Both companies have previously stated that, post-acquisition, Accuray will have an installed base of more than 550 units in 32 countries and more than 1,100 employees. The combined revenue of the two firms in calendar year 2010 exceeded $400 million — 30 percent of which was generated from service of the installed base. Accuray forecasts that the deal will be accretive to earnings by July 2012.
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