Sonic Healthcare
Recommendation
The once-listed but now private equity-owned pathology company Healthscope has decided that competing with market leader Sonic Healthcare is just too difficult. Sonic announced today that it will acquire Healthscope’s pathology businesses in New South Wales, the Australia Capital Territory, Queensland and Western Australia. Healthscope will retain its pathology operations in Victoria, South Australia and the Northern Territory, where it has much stronger market shares.
The acquired operations are only marginally profitable, but Sonic will pay $100m for them. Size matters in pathology, so Sonic expects to benefit from integrating the Healthscope volumes into its existing network. Taking these ‘synergies’ into account, Sonic estimates it is paying less than five times earnings before interest tax, depreciation and amortisation (EBITDA). This is an attractive acquisition.
Shareholders should bear in mind two issues, however. First, the acquisition will take Sonic above 50% market share in New South Wales and Queensland. So it could be knocked back by the ACCC, although it’s arguable whether the deal will result in a ‘substantial lessening of competition’ given Sonic is already dominant in these states.
Second, a $100m acquisition means Sonic is another step closer to its debt ceiling. With the share price on a tear lately, a capital raising is becoming more likely, as we argued on 11 Apr 12 (Hold – $12.20). The stock is up 5% since then and we’re likely to upgrade the recommendation guide prices if this acquisition is approved. For now, HOLD.
Note: The model Growth portfolio owns shares in Sonic Healthcare.