Healthscope bids also fuel speculation of a big clinical pathology transaction
Last week in Australia, investment insiders shared rumors that Quest Diagnostics Incorporated (NYSE: DGX) was interested in acquiring Sonic Healthcare Ltd. (ASX: SHL). However, press stories discounted the possibility of a deal between these two billion-dollar clinical pathology laboratory behemoths. Neither company has issued a public statement addressing this issue.
In assessing the possibility of Quest Diagnostics acquiring Sonic Healthcare, the Sydney Morning Herald (SMH) threw cold water on the idea. It pointed out that Sonic’s stock price is trading at a multiple of 10.8 times earnings before interest, taxes, depreciation, and amortization (EBITDA). That would make Sonic an expensive purchase for Quest Diagnostics, since Quest’s share price trades at a multiple of seven times EBITDA. Further, SMH’s reporter pointed out that Sonic’s market capitalization of A$5.7 billion would make it a major acquisition for Quest Diagnostics, which has a market capitalization of U.S.$9.5 billion.
The publication of stories linking Quest Diagnostics and Sonic Healthcare does show how the clinical laboratory testing business is starting to cross international borders. Further, this is the second time in recent weeks that Sonic Healthcare has been linked in some manner to merger/acquisition talk. In May, Australia-based Healthscope (ASX: HSP) became a takeover target—even attracting a bid from U.S.-based Tenet Healthcare Corporation (NYSE: THC).
Healthscope is not familiar to American pathologists and clinical laboratory managers. In Australia, it operates 43 private hospitals and is the nation’s second largest private hospital provider. It became one of the major pathology testing companies in Australia following its acquisition of Gribbles Pathology in 2004. Gribbles, along with Sonic Healthcare and Primary Healthcare Limited are Australia’s three largest pathology companies.
At least three companies put forth bids for Healthscope. The first bid came from a private equity consortium that included Texas Pacific Group and The Carlyle Group. Another bid surfaced from a Kohlberg Kravis Roberts and CVC. A third bid was announced by Tenet Healthcare. But following that announcement, Tenet’s stock price fell significantly. That caused the U.S. hospital company to withdraw its offer on Monday, June 7.
Since the buyers are primarily interested in Healthscope’s private hospital business, financial experts speculated that it was likely that the eventual buyer would want to divest the pathology business unit. If that was to happen, then Sonic Healthcare, along with its competitor Primary Healthcare, would be likely buyers.
In fact, it was communicated to Dark Daily that Ken Freeman, former Chairman and CEO of Quest Diagnostics and currently Managing Director of Kohlberg Kravis Roberts & Co., was spotted in Australia during the time that interested parties were submitting bids for Healthscope. That may have been one reason why some financial analysts in Australia began to speculate that Freeman might be exploring how to craft a deal between Quest Diagnostics and Sonic Healthcare.
There’s an interesting back story associated with the potential acquisition of Healthscope. Alert readers of Dark Daily may recall that Healthscope is the owner of Labtests, located in Auckland, New Zealand. It was a controversial event when the Auckland District Health Boards awarded the most recent multi-year testing contract to Labtests over Diagnostic MedLab (DML), which was the then-exclusive pathology lab test provider in Auckland and is owned by Sonic Healthcare.
Thus, it would be a bit of irony in Auckland if Healthscope was to be acquired by one of the two remaining bidders and its pathology laboratory business sold to Sonic Healthcare. That would mean that the Auckland District Health Boards would once again be dealing with DML/Sonic Healthcare as the exclusive provider of laboratory testing services in the region.
For pathologists and clinical laboratory administrators in the United States, the activity of American companies in Australia demonstrates forward progress in the globalization of healthcare and clinical pathology laboratory testing. Increasingly, investors are willing to cross borders to buy and operate healthcare businesses in different countries simultaneously. Within the laboratory testing industry, Sonic Healthcare remains the best example of this trend, with its laboratory testing businesses in Australia, New Zealand, Europe, and the United States.