Australian Clinical Labs launches a hostile takeover of its bigger rival, Healius

Australian Clinical Labs’ hostile takeover bid for Healius is expected to deliver tens of millions of dollars in savings, but analysts are worried there could be regulatory issues.

Australian Clinical Labs expects its proposed merger with Healius to deliver $95m in cost savings.

Australian Clinical Labs has launched a hostile takeover of bigger and troubled rival Healius as part of its bold plan to become the nation’s largest provider of pathology services.

Such is ACL’s confidence – which has rebounded from last year’s cyber attack, involving hackers accessing the test records of hundreds of thousands of patients – that it says its management is better placed to lead Healius. It hasn’t even offered shareholders a premium.

ACL has proposed an all-scrip takeover, which involves offering 0.74 ACL shares for each Healius share. This would equate to Healius and ACL shareholders owning 68 and 32 per cent respectively of the new entity.

The news sent Healius shares soaring 8.3 per cent to $3.01 on Monday, valuing the company at $1.7bn – more than twice the size of ACL’s. It comes as Healius’s is edging closer to its 3.5x gearing level under its bank covenant.

Meanwhile, earnings have fallen dramatically since the height of the pandemic, when pathology services were in strong demand, with taxpayer-funded Covid-19 tests evaporating.

The deal – first flagged by The Australian’s DataRoom column – is because investors have been placing pressure on the two parties to combine after a disappointing performance from Healius.

While analysts highlighted the cost savings – which ACL’s estimates to be $95m – from merging Australia’s second and third-biggest pathology companies, they were concerned about potential intervention from the Australian Competition and Consumer Commission.

RBC Capital Markets analyst Craig Wong-Pan said the takeover was “opportunistic”.

“We agree there are significant cost synergies from a merger between ACL and HLS. (But) we are wary of the ACCC approving this transaction in the current form,” Mr Wong-Pan said

“We expect asset divestments may be required to obtain ACCC approval, which could reduce the amount of synergies from the merger.”

ACL attempted to allay investor concerns in its 191-page bidder’s statement, saying it has “good prospects of securing ACCC clearance for the proposed merger”.

Taxpayer-funded Covid-19 tests have evaporated. Picture: Alan Barber

“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,” ACL said.

“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.”

ACL also highlighted the number of smaller pathology providers which have “rapidly” entered the market.

“4Cyte Pathology, which entered the industry in 2018 … now operates from more than 700 approved collection centres across NSW, Victoria and Queensland. 4Cyte’s significant expansion into Queensland is only recent, where 4Cyte has now established itself as the third-largest provider, opening over 200 approved collection centres since 2020,” it said.

ACL expects the ACCC approval process to take six months. Its takeover offer for Healius closes on September 29.

Healius has urged shareholders to take no action in respect of ACL’s takeover offer.

“The board will evaluate the offer and ACL’s bidder’s statement and provide shareholders with a recommendation in due course. Until then, there is no need for shareholders to take any action,” the company said in a statement to the ASX.

Private equity firm Crescent Capital floated ACL at a value of $809m in May 2021. The company says that it has “consistently delivered superior financial performance to Healius”. Healius has delivered total revenue growth in the past three years of 1.9 per cent. This compares with 11.9 per cent for ACL.

In the past 18 months, Healius has generated a dividend yield of 3.8 per cent versus ACL’s 15.6 per cent.

“The merger of Healius with ACL and the synergies and value creation that are expected to be unlocked is expected to create a fundamental step change in value for both shareholder groups,” ACL chairman Michael Alscher said.

ACL chief executive Melinda McGrath said the merger would provide “enhanced scale, profitability and potential for expansion”.

Australian Clinical Labs boss Melinda McGrath expects big returns from the tie-up.

“Together, this is expected to deliver stronger earnings, and has the potential to create a value uplift for the merged group of $2.1bn,” she said.

“The increased balance sheet strength achieved through the proposed merger will enable acceleration of investments to enhance and expand a range of patient and doctor services, including developing and bringing new tests into Australia, creating centres of clinical excellence, enhancing regional service sustainability, and investment in digital and automated solutions.

“We believe the merged group will deliver stronger outcomes for both groups of shareholders, and for doctors and patients, and deliver environmental benefits through a reduced carbon footprint.”

Barrenjoey analyst Saul Hadassin late last month said the decline in Healius’ pathology EBITDA margin was “already known” but the integration of Agilex – the bioanalytical and toxicology laboratory it bought in late 2021 – has not gone to plan.

“The contribution from Agilex for the half was disappointing, with revenue of $16m and EBITDA of $2m well below the company’s previously estimated CY22 contribution of revenue $36-$40m and EBITDA $14-$16m,” he said.

Mr Hadassin expected a “very modest improvement” in Healius’s overall earnings this year based on an ongoing decline in higher margin Covid-19 PCR revenue contribution, offset by a recovery in base business. It also received $140m after it sold its day hospitals late last year and.

“Based on our forecasts (which allow for debt paydown post receipt of Day Hospitals cash), this suggests that HLS’s net debt/EBITDA will get very close to the 3.5x covenant,” Mr Hadassin said.

“We note the bank covenant excludes share-based payments and there is the potential for EBITDA to come in ahead of our forecasts should base business recovery more swiftly than expected. We await further monthly Medicare data to assess this latter point.”