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Pharma trends: Labcorp seen luring buyout before health-care revamp

Posted on 29 August 2012

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Laboratory Corp. of America Holdings is making pharma trends by offering one of the biggest bargains to private-equity firms searching for health-care deals before a government-mandated overhaul adds millions of new customers.

The provider of medical tests trades for 11.8 times analysts’ 2013 earnings projections, the second-lowest level among U.S. health-care-services companies valued at more than $1 billion, according to data compiled by Bloomberg. On Aug. 1, its shares rallied the most since 2008 amid optimism a private- equity firm was considering a deal, and they have held most of that gain even after LabCorp (LH) said it wasn’t in discussions.

“I see the Affordable Care Act as a positive for this company, and I’m sure private equity does as well,” Anthony Vendetti, a New York-based analyst for Maxim Group, said in a telephone interview. “Would it make sense for private equity to look at LabCorp? My answer is a resounding ‘Yes.’”

Stephen Anderson, a spokesman for Burlington, North Carolina-based LabCorp, didn’t immediately respond to a phone call or e-mail seeking comment.

Takeover Speculation

LabCorp’s stock rose 4.5 percent to $87.90 on Aug. 1 after Debtwire, without identifying the source of the information, said the company may be acquired by a private-equity group and that Bank of America Corp. was leading efforts to raise capital to fund the buyout.

Following the report, LabCorp issued a statement saying it “has no knowledge of any such plans and is not in current discussions with any firms to effect such a transaction.”

Diagnostic testing businesses such as LabCorp may benefit when the health-care law goes into effect, said Kevin Ellich, a Minneapolis-based analyst for Piper Jaffray. The law, backed by President Barack Obama and upheld by the Supreme Court in June, expands access to health care. That will lead to more doctor visits and lab work, Ellich said.

The baby-boomer generation -- people born between 1946 and 1964 -- started turning 65 last year, which has led to an influx of Medicare enrollment. That may also spur growth for testing companies, Ellich said.

Lower Leverage

LabCorp’s cash generation may convince a private-equity buyer to consider the company, as might its relatively unlevered balance sheet, Perkins said. The company’s debt amounts to 1.6 times earnings before interest, taxes, depreciation and amortization, less than the 2.4 level at Quest.

“Private-equity businesses tend to look for really stable cash flows without a lot of cyclicality, and LabCorp would certainly fit that bill,” he said. Also, the U.S. health-care overhaul, by increasing the number of people seeing doctors, makes the company more attractive, Perkins added. “This is a fairly fixed-cost-driven business, so those additional volumes are valuable in terms of earnings and cash flow.”

 

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