I think the reason why they are going to have to pay the doctors...

I think the reason why they are going to have to pay the doctors a whole lot more money each year is to give them an enticement to recontract.

The practice aggregation model is clearly flawed and this is what drove EBIT growth (and subsequently share price growth) in the past when capital was easy to come by.

Given that this model is now pretty much dead as far as i can see, the doctors will need an incentive to recontract with VGH, otherwise they will just go out and start their practive afresh when their contract ends.

Don't blame the doctors - I would have done exactly what they did (they must be ruing their decision to sell their practice for stock in VGH now as the value of their practice has been decimated).

Management are to blame. The jury is still out on Tanner - he indicated a couple of months ago that doctor remuneration was going to have to go up to retain doctors and that this would negative impact earnings. If you didn't realise this at the time, you were being nieive (spelling?).

Anyway, the issue now is the debt. They've lost ~$2M in EBIT from the 4 doctors leaving, plus say another $5M to come from the increase in doctor salaries (assumes an increase of $120K per doctor), and lets just say another 10% of FY09 EBIT due to management being incompetent. Back of the envelope, we'll end up with an EBIT of $23M.

This is going to lead to them breaching their debt covenants...so they'll have to issue equity to pay down debt. Say they issue $25M of debt at 15 cents. A couple of questions:

1. Who the hell is going to buy the equity?
2. Is the company worth it after issuing all those new shares (in the scenario above, they would issue an additional 166M shares).

My back of the envelope analysis indicates that in the above scenario EPS would end up at 5 cents per share, giving the company a PE of 4 at today's price. Which, given that there is no real future growth options, and the risk of doctors failing to recontract is constant, feels about right to me.

The only other alternative is to renegotiate their debt...but are the banks really going to refinance when incompetent management and the board have flogged this horse dead?

Shame i didn't do this thinking two or three months ago...