LabCorp Seen Luring Buyout Before Health-Care Revamp

The Laboratory Corporation of America Headquarters
Laboratory Corp. of America Holdings is 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. Photographer: David Sandler/Bloomberg

Laboratory Corp. of America Holdings is 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 said it wasn’t in discussions.

The Patient Protection and Affordable Care Act will extend health-care coverage to 32 million Americans, according to the Congressional Budget Office. Piper Jaffray Cos. says that will boost demand for tests because 70 percent of doctor visits result in one, making LabCorp an alluring target for a leveraged buyout. An acquirer probably needs to pay at least $106 a share, or 21 percent more than yesterday’s close, Maxim Group LLC said.

“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.

“What’s attractive about the lab industry is you’ve got an aging population and you’ve got health-care reform coming,” he said. “LabCorp would stand to pick up some of that volume.”

Lower Valuation

Even with the shares yesterday closing 64 percent above the three-year low reached in March 2009, LabCorp’s valuation versus 2013 earnings estimates is less than eight of the nine other health-care-services stocks trading above $1 billion, data compiled by Bloomberg show. Only Chemed Corp. is cheaper, and its operations aren’t confined to health care given its ownership of the Roto-Rooter plumbing company.

Today, LabCorp rose 1.5 percent, the most since the Aug. 1 rally, to $88.84.

Quest Diagnostics Inc. has the group’s third-lowest multiple at 12 times next year’s earnings, analysts’ estimates compiled by Bloomberg show. Both Quest and LabCorp make tests that screen everything from allergies to cholesterol levels and various diseases.

Maxim’s Vendetti said that while Quest controls a larger share of the market, LabCorp’s growth potential makes it a more attractive acquisition target. LabCorp is projected to grow revenue by 9.4 percent through 2014, while Quest’s sales will increase 5.2 percent, according to analyst estimates compiled by Bloomberg.

‘Slight Advantage’

“If I were to choose between the two companies, I would choose LabCorp if I were a private-equity guy,” he said. “LabCorp has the slight advantage in terms of being more attractively valued.”

A phone call and e-mail to Madison, New Jersey-based Quest’s media relations office wasn’t immediately returned.

Private-equity firms may be attracted to LabCorp’s free cash flow, said Jason Gurda, a New York-based analyst for Leerink Swann LLC.

In the last 12 months, the company’s operations generated $700 million of cash after deducting capital expenses, data compiled by Bloomberg show. It also earned 19 cents of operating profit for every dollar of sales, giving it the industry’s second-highest margin over that span, the data show.

“It could be an attractive LBO candidate,” Gurda said in a phone interview. “It’s a stable, high-margin business with great cash flows.”

Potential Prices

A buyer would probably need to pay at least $106 a share for LabCorp, which closed yesterday at $87.51, according to Maxim’s Vendetti. Piper Jaffray’s Ellich sees the potential for a price exceeding $100. At $102, private-equity firms could achieve an internal rate of return of about 20 percent, he said. Citigroup Inc.’s Gary Taylor wrote in a July 31 report that buyout firms could spend up to $100.

“We value LabCorp at around $115 a share and we wouldn’t be excited about parting with it at a price lower than that,” David Perkins, a fund manager for Omaha, Nebraska-based Wallace R. Weitz & Co., which oversees $4.5 billion including LabCorp shares, said in a telephone interview.

With $8.4 billion in market capitalization, LabCorp may be too large for private-equity buyers, said Brian Tanquilut, a Nashville, Tennessee-based analyst with Jefferies Group Inc.

‘Too Big’

Including the company’s $1.99 billion in net debt, LabCorp would be the biggest leveraged buyout since 2007, even without the buyer paying a premium, data compiled by Bloomberg show. It would also surpass Richard Schulze’s $7.59 billion offer this month to take Best Buy Co. private, which is poised to be the retail industry’s largest leveraged buyout, the data show.

“It’s too big,” Tanquilut said in a phone interview. “You need at least $100 a share to take it out. The leverage you have to put on the balance sheet to get there would be on the high side of what debt people are willing to do right now.”

The government-mandated reorganization of the health-care industry may actually hurt LabCorp, according to Les Funtleyder, a fund manager focused on the health-care industry at New York-based Poliwogg. Laboratory testing rates are likely to fall as insurance companies and hospitals seek to reduce costs, he said.

“There is an argument to be made that we are over-tested,” he said. “Under most cost-control scenarios, that would be one of the first things to go.”

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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