Wall Street is quick to let companies know if they're heading down an undesired path, as Laboratory Corporation of America Holdings is learning.
The Burlington, North Carolina-based clinical laboratory company, known as LabCorp, couldn't miss a message from shareholders Monday, who relegated it to the worst-performing stock on the S&P 500 Index. They pummeled it, shaving $800 million off its market value (to $13.4 billion) in response to a Reuters report that it is in talks to acquire Pharmaceutical Product Development LLC for more than $8 billion, including debt.
There is strategic rationale for the deal -- potential synergies can be achieved by combining the two companies, which conduct clinical and other trials. Size and valuation, though, are obstacles. PPD, owned by private equity firms Carlyle Group LP and Hellman & Friedman LLC, isn't cheap at an estimated multiple of 2.9 times estimated 2017 revenue of about $2.8 billion and more than 11.4 times earnings before interest, taxes, depreciation and amortization of roughly $700 million.
Even if LabCorp used a mix of cash and stock to finance the transaction, the company's debt load would balloon. Already -- at more than 3 times Ebitda -- it exceeds management's targeted ratio of 2.5, having climbed as a result of the company's roughly $5.6 billion purchase of Covance Inc., which closed less than two years ago. Plus, any deal for PPD would see management reversing course on its pledge to finally resume returning capital to shareholders (LabCorp hasn't repurchased shares since 2013).
To appease investors, LabCorp should strive to satiate its deal appetite with purchases that are less pricey-- and perhaps focused on another segment. One alternative is to channel its attention toward food safety and nutritional chemistry, an area of potentially significant growth which the company gained exposure to through the Covance acquisition. And after that deal, LabCorp bought Safe Foods International.
LabCorp's president and CEO David King has described that industry as highly fragmented and in need of consolidation. Stepping up to such a task at a time when food and beverage companies beyond just Chipotle Mexican Grill Inc. are seeking to ensure the security of their supply chains is a move that would likely be well received. And who doesn't like positive feedback?
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Figures are from a Wall Street Journal article in December reporting the company's exploration of a sale.
The idea of a PPD purchase also brings to mind INC Research Holdings Inc., which was said to be in LabCorp's grasps last April and has since climbed to a record high.
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