CBAY

Litigation issues inherited from August’s acquisition of Philips’ MedQuist operation have prompted Milan Radia at Jefferies International to downgrade medical transcription group CBay Systems (CBAY:AIM) from ‘buy’ to ‘hold’. The $287 million deal for a 69.5% stake looked to be a bargain at less than a quarter the $1.2 billion paid by Philips in 2000. However, CBay has taken on huge risks since MedQuist faces several lawsuits over alleged over-billing practices.

‘Given the range of lawsuits that the company currently faces and that a number of these claims are class actions, we find ourselves unable to quantify the extent of associated financial and business risks,’ says Radia. ‘Some progress has been made in resolving class action lawsuits relating to legacy billing malpractice issues, some litigation remains ongoing.’ However, the analyst believes that once the issues are resolved, ‘an attractive investment case emerges’.

Radia says while the two business should complement each other, there is a clear execution risk of achieving cost synergies through choosing to operate the two companies independently. The price target has been slashed from 100p to 77p. Since Radia’s note was published, the stock has edged up to 79.5p.

by Dan Coatsworth