CardioNet's Not So Big Surprise

Riddle us this. When is news not news at all? When it’s involving CardioNet Inc.’s Friday filing for an IPO.

See, this filing was essentially a done deal when CardioNet secured $110 million from investment banks and hedge funds in the spring. In fact, that financing isn’t entirely complete until CardioNet goes public because the participants in that round won’t receive their shares in the company until after the IPO.
It sounded strange to us at the time, but here’s how CEO James Sweeney explained it in our April START-UP article:

In exchange [for the $110 million], the providers of the capital obtained mandatorily convertible preferred stock that will convert into common stock in the company on the eve of a successful IPO. They'll get a discount on the stock; anywhere between 10% and 25% depending upon the success and timing of the IPO. Sweeney says no debt was issued. Investors only got the promise of common stock upon the completion of the IPO.

Therefore, the valuation of the company for this deal won't actually be set until it goes public. "This is a very new product," Sweeney suggests. "In fact most of the people we sold it to hadn't seen it before."

So CardioNet and its investors didn’t set a valuation for the $110 million. Why? With no value for the last private round, Sweeney suggested the company could more favorable negotiate terms for the IPO. Sounds fine, if everything goes well and the company goes public at attractive terms. But if this company can’t go public, the terms of the private round will be “punitively expensive,” according to one investor.

Putting all these financing machinations aside for a moment, CardioNet’s wireless system looks to offer a real opportunity for innovation in health care. We’ll just wait and see how all this financing sorts out.

If you want to read more on this financing, please check out the article. But here’s one more interesting point. It looks as if this road show is entering its fifth or six month. Citigroup Global Markets and Sun Trust Robinson Humphrey, which served both as co-placement agents for the $110 million round, now are serving as underwriters for the IPO. Citi is also listed as an underwriter.