Our “Deal of the Month” goes to Laboratory Corporation of America’s (NYSE: LH) proposed acquisition of DIANON Systems (NASDAQ: DIAN) for just under $600 million. In its bid to become the premiere oncology laboratory company, LabCorp is making its richest acquisition ever.
Based in Burlington, North Carolina, LabCorp is a clinical laboratory company that provides its clients with a broad range of testing services through a network of 24 testing facilities and 1,200 service sites. On a trailing 12-month basis, the company earned $205 million on revenue of $2.3 billion, and generated EBITDA of about $434 million.
No stranger to growth by acquisition, LabCorp has made several deals over the years. A number of them, made during the past four-year period, are detailed in the table on page 3.
Most recently, in May, LH agreed to acquire publicly traded Dynacare, a provider of clinical laboratory services through 21 testing labs with annual revenue of $414.3 million and EBITDA of $52.9 million. Dynacare was a portfolio company of GTCR Golder Rauner. There LH paid $685 million in cash, stock and the assumption of liabilities to yield a price to revenue (P/R) multiple of 1.70x.
Based in Stratford, Connecticut, DIAN is a provider of anatomic pathology testing services. Its three business concentrations include anatomic pathology (69% of revenue), genetics services (13%) and clinical chemistry testing (18%). On a trailing 12-month basis, DIAN earned $11.9 million on revenue of $182 million, and generated EBITDA of $24 million. The company has no significant debt to speak of.
DIAN employees process as many as 8,000 samples per day in one main testing lab and four regional labs. The company focuses on the outpatient market and specializes in oncology testing both in its anatomic pathology and in its genetics services segments.
From humble beginings, DIAN has grown through acquisitions, most of them small. In 1998, the company acquired Pathologists Reference Laboratory, an anatomic pathology laboratory services based in Tampa, Florida with annual revenue of about $1.6 million. At that time, DIAN paid $558,000 in cash and the assumption of liabilities, which yielded a P/R multiple of 0.40x.
After a number of other small deals, DIAN paid $202 million in June of 2001 to acquire publicly traded UroCor, an Oklahoma City-based provider of diagnostic services for the clinical management of certain urological cancers and diseases. UroCor generated annual revenue of about $62 million, which generated a P/R multiple of 3.3x. More than anything else, this deal made DIAN a major player in providing cancer testing services, which with the promise of higher revenue made it attractive to LabCorp.
Under terms of the current acquisition, LH is paying $47.50 in cash for each of DIAN’s 12.6 million shares of common stock outstanding. That gives a purchase price of $598 million. The price per share comes between DIAN’s 52-week low of $31 (July 2002) and its 52-week high of $72 (April 2002). This deal offers DIAN shareholders an 18% premium over the price at which the stock was trading the day before the announcement. The $598 million figure yields a P/R multiple of 3.3x and a price to EBITDA multiple of 25x. This high P/R multiple may reflect the high multiple that DIAN paid for UroCor. While LH paid more for Dynacare, in terms of P/R multiple, this transaction is clearly the richest deal that LH has made yet.
This transaction is to be financed by a combination of cash on hand, borrowing under LabCorp’s existing credit facility and a new bridge loan facility.
The deal should not greatly hamper LH’s finances; the company has been a disciplined buyer over the years, paying for its acquisitions primarily with cash. In only two of the 10 deals noted on page 3 has LH stock figured in the consideration for an acquisition.
LabCorp has high hopes for the DIAN acquisition. It expects that this acquisition will add $210 million in revenue and $55 million in EBITDA in 2003. LabCorp further expects to realize annual cost savings synergies of $35 million by the end of 2005.
This deal will also help LH to close the gap with industry leader Quest Diagnostics (NYSE: DGX) with 2001 sales of $3.6 billion. Post-closing, LH will be well- positioned to emphasize genetic testing services and to offer new genomic tests for cancer, capitalizing on LH’s partnerships with Myriad Genetics (NASDAQ: MYGN), EXACT Sciences Corporation (NASDAQ: EXAS), Celera Diagnostics (NYSE: CRA) and Correlogics Systems.
Importantly, to the extent that these tests do not fall under the rubric of anatomic pathology services, they will not be directly subject to various provisions of Medicare that have tended to decrease reimbursement levels for anatomic pathology services.