PE-Backed Spheris Files for Bankruptcy

WILMINGTON, Del. (Reuters) – Spheris Inc, a provider of document services for hospitals, filed for bankruptcy on Wednesday and plans to sell its U.S. business to MedQuist Inc, its largest competitor, for $75.25 million, according to court documents.

As part of the sale, CBay Inc would acquire the stock of Spheris India Private Ltd, a unit of Spheris that is not part of the bankruptcy, according to a press release.

MedQuist (MEDQ.O) and CBay Inc are portfolio companies of CBaySystems Holdings Ltd (CBAY.L).

If approved, the deal would create the largest medical transcription company.

To support Spheris’ business during the bankruptcy, its lenders will extend a $15 million debtor-in-possession loan.

As a condition of the loan, the company agreed to auction its U.S. business, with MedQuist acting as a “stalking horse” bidder and setting the initial auction price.

Such bankruptcy sales are often used as a way to provide a quick recovery for creditors. MedQuist said in a statement it expects the sale to close in the first half of the year. The deal must be approved by a bankruptcy judge.

The proceeds from the auction will be used to satisfy Spheris’ debt, which included $75.6 million in secured loans and $125 million in unsecured debt, according to court documents.

The company said in court documents that significant technological changes pushed down prices for its services, depressing revenues and leaving it unable to service its debt.

The company’s medical language specialists receive digital medical dictation from physicians and then convert this into text and transmit the records back, sometimes in less than a few hours.

Spheris employs 4,200 specialists, with 1,900 of them in India.

Mount Laurel, New Jersey-based MedQuist employs 6,000 medical transcriptionists and 7,500 overall.

Spheris, which is based in Franklin, Tennessee, is owned by Warburg Pincus, TowerBrook Capital Partners and Community Health Systems Inc (CYH.N), according to court documents.

Spheris did not immediately return calls for comment.

Shares of CBaySystems ended up 3.4 percent in London. Shares of MedQuist closed 4.05 percent higher on Nasdaq.

The case is In re Spheris Inc et al, U.S. Bankruptcy Court, District of Delaware, No. 10-10352. (Editing by Gerald E. McCormick, Gary Hill)