Australian Clinical Labs (ASX: ACL) has lobbed a $1.58 billion off-market offer to merge with one of its biggest competitors, Healius (ASX: HLS), as it looks to become the nation's largest pathology services provider and secure a deal that could have it "knocking on the door of the ASX 100".
While ACL is the smaller of the two - with a market capitalisation of $726.6 million prior to its proposal - the Melbourne-based player believes it can help its larger rival turn around its operations, which posted a net profit loss of $28.7 million and earnings loss of $13.2 million in 1HFY23.
If the deal goes through, the combined entity will have 171 labs and 3,413 collection centres across the country, with expectations they will save up to $95 million over the next four years under the proposed combination of their labs, logistics, procurement benefits, back-office activities and overlapping IT systems.
Off the back of the news, Healius shares jumped 10 per cent this morning to $3.06 each, while ACL shares grew by 4.2 per cent to $3.75 per share. The Healius board however has asked shareholders to take no action while directors evaluate the bidder's statement.
"The merged company will be knocking on the door of the ASX 100 and be the largest commercial pathology company in Australia and one of the largest in the world," Australian Clinical Labs chair Michael Archer said to shareholders this morning.
Under the proposed agreement, Healius shareholders will receive 0.74 ACL shares for every Healius share held. It would also see existing Healius shareholders hold 68 per cent of the merged group, with ACL shareholders owning the remaining 32 per cent.
The potential deal comes more than a year after ACL acquired Medlab Pathology for $70 million, and will be the group’s sixth acquisition over the last eight years if successful – adding to its existing portfolio of Healthscope’s Australian pathology business, St John of God Health Care’s pathology business, Perth Pathology, and SunDoctors.
The group claims its track record could instil confidence it can help turn around Healius’ pathology division, which has reported four years of declining performance and a 2.1 per cent fall in EBIT margins over the same period.
“The current ACL management team has overseen the creation of ACL’s business from an underperforming, loss-making, $280 million annual revenue pathology division acquired from Healthscope in 2015 to an approximately $700 million annual revenue business in 1H23, with leading financial benchmarks for the pathology sector in Australia,” Australian Clinical Labs said to shareholders today.
“As a result, ACL is well-equipped to de-risk the required operational turnaround at Healius that was first announced in 2019, and has a demonstrated ability to manage cost outs and performance improvement without the requirement for significant normalisations.”
For the deal to go ahead, it must receive clearance from the Australian Competition and Consumer Commission (ACCC) – a hurdle ACL believes it will easily overcome.
“ACL does not believe that there will be a substantial lessening of competition in any market as there is negligible price competition in the pathology industry (approximately 99.7 per cent of outpatient pathology tests are priced at the Medicare schedule, which is set by the Australian Federal Government) and there is limited scope for the merged group to reduce service quality due to the stringent regulation of testing standards and the prevalence of standardised, automated testing equipment,” the company said.
As a merged entity, ACL has forecast an EBIT of $361 million for FY23 - more than double the combined FY23 EBIT of each of Healius and ACL on a standalone basis.
Without the merger, ACL expects an EBIT of between $68 million to $74 million in FY23, a significant drop-off from its $266.6 million result in FY22.
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