Here’s the latest shake-up to the laboratory testing marketplace. Quest Diagnostics Incorporated announced this morning that it will acquire AmeriPath, Inc. in a transaction valued at $2 billion.

Both parties expect the deal to close before June 30, 2007. AmeriPath’s annual revenues are in excess of $800 million. Quest will pay $1.23 billion in cash and assume about $770 million of debt when the transaction closes.

With its purchase of AmeriPath, Quest Diagnostics picks up three diverse businesses in laboratory testing. First, it acquires Specialty Laboratories, Inc., based in Valencia, California. Specialty Labs provides reference and esoteric testing services to hospital and certain physician specialists.

Second, it will own AmeriPath Dermatopathology. This business division employs 80 pathologists located in offices across the United States. This business line is fast-growing and very attractive to Quest Diagnostics.

Third, it will come into ownership of the remaining anatomic pathology assets owned by AmeriPath. The largest component of this business division is the hospital-based pathology group practices that AmeriPath acquired over the past 10 years. There are also several pathology subspecialty centers in areas such as gastroenterology, oncology, women’s health, and urology.

For Quest Diagnostics, the timing of this acquisition allows it to shift the attention of Wall Street away from the UnitedHealth contract. The AmeriPath acquisition also allows it to gain lab testing revenues that will more than offset expected losses from the UnitedHealth contract. AmeriPath’s revenues will keep Quest Diagnostics on a growth track for 2007.

But with every laboratory acquisition comes with its own set of unique challenges. It has long been known that AmeriPath has struggled to find the right key to unlock financial success from its multiple business models. In buying AmeriPath, Quest Diagnostics will need to move carefully to integrate AmeriPath’s laboratory testing assets into its existing national laboratory network to maximize the benefits from this acquisition. These issues will be explored in the upcoming issue of The Dark Report.

Finally, one particularly happy party to AmeriPath’s sale is Welsh, Carson, Anderson and Stowe, AmeriPath’s majority shareholder. In March 2003, it paid approximately $840 million to buy the public stock of AmeriPath and take the company private. Then, in January 2006, AmeriPath paid an estimated total of $314.7 million to buy all the public shares of Specialty Laboratories. The impending sale to Quest Diagnostics comes only four years after Welsh Carson acquired AmeriPath and allows the private equity company to cash out its investment.

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