Sonic acquires German lab
Recommendation
Sonic Healthcare has announced the purchase of two large pathology laboratories in north-west Germany for €63m (around $89m) with a mix of cash and debt. Founded in 1961, Medical Laboratory Bremen has 275 staff. The company has €30m of revenue and is expected to increase Sonic's earnings per share by 2% following the acquisition, which implies a net profit of around €6.3m. That suggests a profit margin more than double Sonic's, which is impressive and probably due to Bremen focusing on higher-margin specialty testing.
Sonic already owns several other labs in Germany and the small size of this acquisition means it should be easy to manage. We also expect Sonic to be able to cut costs as duplicate expenses are removed, which bodes well for future earnings growth. Test volumes may increase too if Sonic adds ancillary medical services that are available at its larger labs.
In recent years, the German government has gradually reduced the insurance reimbursement funding pools to curb runaway healthcare costs. We expect this funding pressure to benefit Sonic at the expense of smaller operators, which are then encouraged to sell to a larger network to benefit from economies of scale. The Bremen acquisition seems to be a case in point. Sonic is due to report its interim result on 15 February and we continue to recommend you HOLD.